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Transcript
NO. 071-A  MAY 1990
Governmental
Accounting Standards Series
[Completely Superseded]
Statement No. 11 of the
Governmental Accounting
Standards Board
Measurement Focus and
Basis of Accounting—
Governmental Fund
Operating Statements
Governmental Accounting Standards Board
of the Financial Accounting Foundation
[Completely Superseded]
For additional copies of this Statement and information on applicable prices and discount
rates, contact:
Order Department
Governmental Accounting Standards Board
401 Merritt 7
PO Box 5116
Norwalk, CT 06856-5116
Telephone Orders: 1-800-748-0659
Please ask for our Product Code No. GS11.
The GASB website can be accessed at www.gasb.org.
[Completely Superseded]
Summary
This Statement is fundamental to the Board’s overall reexamination of governmental
accounting and financial reporting. It establishes measurement focus and basis of
accounting standards for governmental and expendable trust fund operating statements.
This Statement establishes basic principles that are needed to develop the guidance in
other projects, especially certain expenditure recognition and measurement standards that
will be implemented at the same time as this Statement; it also provides specific guidance
for many governmental fund transactions, primarily revenues. This Statement provides
guidance for balance sheet reporting of general long-term capital debt—liabilities
resulting from capital asset acquisitions or debt financing of certain nonrecurring projects
or activities that have long-term economic benefit. This Statement does not, however,
provide guidance for balance sheet reporting of debt issued to finance operations or
deficits (operating debt) or the long-term liabilities arising from the accrual of
governmental fund expenditures. That guidance will be provided in a subsequent
Statement on financial reporting, which also will be implemented at the same time as this
Statement.
***
Measurement focus refers to what is expressed in reporting an entity’s financial
performance and position. A particular measurement focus is accomplished by
considering which resources are measured and when the effects of transactions and events
involving those resources are recognized. When effects are recognized is referred to as the
basis of accounting.
The measurement focus for governmental fund operating statements should be the
flow of financial resources measurement focus. The operating results expressed using this
measurement focus show the extent to which financial resources obtained during a period
are sufficient to cover claims incurred during that period against financial resources. This
measurement focus considers financial resources only and uses an accrual basis of
accounting.
The flow of financial resources measurement focus for governmental fund operating
statements is responsive to the governmental environment and the needs of users of
governmental financial reports. This measurement focus is based on the concept of
accountability, which includes measuring interperiod equity—whether current-year
revenues were sufficient to pay for current-year services. It also considers the performance
i
[Completely Superseded]
goals and measures of governmental-type activities, the intent and effect of budgets and
other financial controls, and the use of fund accounting to achieve and demonstrate legal
compliance and to enhance financial administration.
The flow of financial resources measurement focus requires governmental fund
operating statements to recognize the effects of transactions or events on financial
resources when they take place, regardless of when cash is received or paid. Financial
resources are cash, claims to cash (for example, debt securities of another entity and
accounts and taxes receivable), claims to goods or services (for example, prepaid items),
consumable goods (for example, supplies inventories), and equity securities of another
entity obtained or controlled as a result of past transactions or events.
Revenues, operating expenditures, and interfund operating and residual equity
transfers are the result of transactions or events that affect financial resources. Also, the
acquisition, disposition, and long-term financing of capital assets and the long-term
financing of certain nonrecurring projects or activities that have long-term economic
benefit are transactions that affect financial resources. The flow of financial resources
measurement focus does not, however, report an operating statement effect for the
issuance and repayment of operating debt.
Governmental fund revenues can result from taxation and from other nonexchange
transactions and events, or they can result from exchange transactions. Tax revenue
should be recognized if the underlying transaction or event has taken place and the
government has demanded the taxes, regardless of when cash is received. For example,
for revenue from income taxes, the underlying event is the earning of income by the
taxpayer and the demand is the requirement for taxpayer remittance of taxes through
withholdings, estimated payments, and final settlement during the fiscal year or within two
months thereafter. Revenue would be accrued to the extent that required tax payments are
delinquent.
Revenue from other nonexchange transactions, such as from fines, fees for licenses
and permits, and donations, should be recognized when the underlying event takes place
and the government has an enforceable legal claim to the amounts, regardless of when
received. Governmental fund revenues from exchange transactions, such as charges for
services and investment income, should be recognized when earned, that is, when the
entity has done what it must do to complete its side of the transaction.
If the taxpayer-assessed taxes and other nonexchange revenues of one government
are administered or collected by another, and the reporting government cannot obtain the
accrual information it needs, this Statement provides certain revenue recognition
alternatives.
ii
[Completely Superseded]
Governmental fund expenditures include operating, capital, and debt service
expenditures. Governmental fund operating expenditures that arise from exchange
transactions generally should be recognized when the transactions that result in a claim
against financial resources take place, regardless of when cash is paid. This includes
recognizing expenditures for prepaid items and supplies using the consumption method.
Compensated absences for other than sick leave should be recognized as
expenditures when the benefits are earned by the employees. An expenditure accrual for
earned sick leave should be made only if a vesting benefit is expected to result in a
termination payment; otherwise, expenditures for sick leave benefits should be recognized
as expenditures when the leave is taken.
This Statement establishes basic definitions of general long-term capital debt and
operating debt. General long-term capital debt is the long-term financing incurred to
acquire capital assets or to provide financial resources for certain nonrecurring projects or
activities that have long-term economic benefit. Operating debt is debt that provides
financial resources to and is expected to be repaid from the financial resources of
governmental funds but does not meet the definition of general long-term capital debt.
Operating debt includes debt issued to finance operations. The issuance and repayment of
general long-term capital debt has an operating statement effect in a flow of financial
resources measurement focus. The issuance and repayment of operating debt does not.
This Statement is effective for financial statements for periods beginning after June
15, 1994.
Unless otherwise specified, pronouncements of the GASB apply to financial reports of all
state and local governmental entities, including public benefit corporations and authorities,
public employee retirement systems, and governmental utilities, hospitals, colleges, and
universities. Paragraph 32 discusses the applicability of this Statement.
iii
[Completely Superseded]
Statement No. 11 of the
Governmental Accounting
Standards Board
Measurement Focus and
Basis of Accounting—
Governmental Fund
Operating Statements
May 1990
Governmental Accounting Standards Board
of the Financial Accounting Foundation
401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116
iv
[Completely Superseded]
Copyright © 1990 by Financial Accounting Foundation. All rights reserved. Content
copyrighted by Financial Accounting Foundation may not be reproduced, stored in a
retrieval system, or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior written permission of the
Financial Accounting Foundation.
v
[Completely Superseded]
Statement No. 11 of the Governmental Accounting Standards Board
Measurement Focus and Basis of Accounting--Governmental Fund Operating
Statements
May 1990
CONTENTS
Paragraph
Numbers
Introduction and Background Information ....................................................................1– 31
Scope of This Statement ................................................................................................1
Relationship of the Conclusions Reached in This Statement to
Other Board Projects ....................................................................................................2
Definition of Terms........................................................................................................3
Background—The Governmental Environment .....................................................4– 24
The Performance Goals and Measures of Governmental-Type Activities ..........6– 8
The Use of Budgets and Other Financial Controls ............................................. 9– 14
Focus of Governmental Budgets ............................................................................11
Budgetary and Financing Intent ......................................................................12– 14
The Use of Fund Accounting .............................................................................15– 19
Interperiod Equity and the Relationship between Revenues and Services ........20– 24
Flow of Financial Resources Measurement Focus................................................25– 31
Operations versus Financial Position Emphasis .......................................................27
Expenditure Recognition and Measurement Based on Funding Methods ........28– 30
Treatment of Operating Debt ....................................................................................31
Standards of Governmental Accounting and Financial Reporting .............................32– 99
Applicability of This Statement ...................................................................................32
Flow of Financial Resources: General Principles .................................................33– 37
Revenues ...............................................................................................................38– 68
Taxes ..................................................................................................................40– 53
General Recognition Criteria ..........................................................................41– 47
Delinquency Accrual and Taxes Discovered through Audit ......................42– 43
Final Settlements ...............................................................................................44
Revenue Reduction for Overdemand ................................................................45
Interest, Penalties, and Uncollectible Amounts ..........................................46– 47
Sales Taxes.............................................................................................................48
Income Taxes .........................................................................................................49
Taxpayer-Assessed Taxes Administered or Collected by
Another Government ...........................................................................................50
Property Taxes ................................................................................................51– 52
Other Taxes ............................................................................................................53
Other Nonexchange Revenues ...........................................................................54– 61
vi
[Completely Superseded]
Paragraph
Numbers
General Recognition Criteria .................................................................................54
Fines ................................................................................................................55– 56
Licenses and Permits .......................................................................................57– 58
Donations ........................................................................................................59– 60
Other Nonexchange Revenues Administered or
Collected by Another Government ......................................................................61
Exchange Revenues ...........................................................................................62– 68
General Recognition Criteria .................................................................................62
Charges for Services ..............................................................................................63
Investment Gains, Losses, and Income ...........................................................64– 67
Operating Leases ....................................................................................................68
Other Financing Sources .......................................................................................69– 71
Capital Leases and Sales of Capital Assets ........................................................70– 71
Residual Equity Transfers-In .......................................................................................72
Expenditures .........................................................................................................73– 82
Operating Expenditures .....................................................................................74– 81
Prepaid Items..........................................................................................................75
Supplies Inventories ...............................................................................................76
Compensated Absences ..................................................................................77– 80
Operating Leases ....................................................................................................81
Capital Expenditures .................................................................................................82
Other Financing Uses ...................................................................................................83
Residual Equity Transfers-Out.....................................................................................84
Debt .......................................................................................................................85– 98
General Long-Term Capital Debt ......................................................................86– 93
Definition ........................................................................................................86– 88
Debt Issuance ..................................................................................................89– 90
Long-Term Vendor Financing ........................................................................91– 92
Debt Extinguishment and Defeasance, including Refunding ................................93
Operating Debt ...................................................................................................94– 98
Definition ...............................................................................................................94
Debt Issuance ..................................................................................................95– 96
Debt Service ...........................................................................................................97
Long-Term Vendor Financing ...............................................................................98
Expendable Trust Funds ..............................................................................................99
Effective Date and Transition ..........................................................................................100
Appendix A: Basis for Conclusions ........................................................................101–259
Appendix B: Glossary .....................................................................................................260
Appendix C: Illustration of the Calculation of Tax Revenues ........................................261
vii
[Completely Superseded]
Statement No. 11 of the Governmental Accounting Standards Board
Measurement Focus and Basis of Accounting--Governmental Fund Operating
Statements
May 1990
INTRODUCTION AND BACKGROUND INFORMATION
Scope of This Statement
1.
This Statement establishes measurement focus1 and basis of accounting standards
for governmental fund operating statements. It also applies to expendable trust fund
operating statements. This Statement provides guidance for balance sheet reporting of
only general long-term capital debt; guidance for balance sheet reporting of other
liabilities arising from or related to the operations of governmental funds will be provided
in a subsequent Statement on financial reporting. Also, because standards will be
provided in other Statements, this Statement does not provide specific operating statement
recognition and measurement criteria for certain transactions.2
1Terms defined in the glossary (Appendix B) are printed in boldface type the first time they are used.
2Issues related to the recognition and measurement in governmental fund operating statements of pension
expenditures; other postemployment benefits; special termination benefits; claims and judgments and related
insurance transactions; capital improvement special assessment transactions; intergovernmental grants,
entitlements, and shared revenues; operating expenditures resulting from nonexchange transactions; and debt
service expenditures on general long-term capital debt are being considered in other Board projects. This
Statement, however, provides basic guidance to those projects; specifically, operating statement recognition
and measurement criteria should be developed within the context of the flow of financial resources
measurement focus and an accrual basis of accounting. Guidance for balance sheet reporting of liabilities
arising from those transactions will be provided in a subsequent Statement on financial reporting.
1
[Completely Superseded]
Relationship of the Conclusions Reached in This Statement to Other Board Projects
2. Governmental financial reporting currently is in an evolutionary phase, and the
Board has many issues to address before it has been reviewed in its entirety. In fact, the
Board has many issues to address before the standards in this Statement can become
effective. This Statement establishes basic principles that are needed for developing the
guidance in other projects, especially certain expenditure recognition and measurement
standards that will be implemented at the same time as this Statement. Issuing this
Statement at this time provides governments the time to develop the information systems
needed to implement the changes required by this Statement.
Definition of Terms
3. Certain definitions are presented here to provide a frame of reference for the
discussion that follows. Definitions of these and other terms are presented in Appendix B
of this Statement.
a.
b.
c.
d.
Measurement focus refers to what is being expressed in reporting an entity’s financial
performance and position. A particular measurement focus is accomplished by
considering not only which resources are measured, but also when the effects of
transactions or events involving those resources are recognized (the basis of
accounting).
Basis of accounting refers to when the effects of transactions or events should be
recognized for financial reporting purposes. For example, the effects of transactions
or events can be recognized on an accrual basis (that is, when the transactions or
events take place) or on a cash basis (that is, when cash is received or paid). Basis of
accounting is an essential part of measurement focus because a particular timing of
recognition is necessary to accomplish a particular measurement focus.
Assets are probable future economic benefits obtained or controlled by a particular
entity as a result of past transactions or events.3 Assets include financial resources
and capital assets.
Financial resources are cash, claims to cash (for example, debt securities of another
entity and accounts and taxes receivable), claims to goods or services (for example,
prepaid items), consumable goods (for example, supplies inventories), and equity
securities of another entity obtained or controlled as a result of past transactions or
events.
3This is a tentative definition of assets for purposes of governmental accounting and financial reporting and
is taken from paragraph 25 of FASB Concepts Statement No. 6, Elements of Financial Statements.
Additional information pertaining to the FASB’s definition of assets can be found in that Statement in
paragraphs 26 through 34.
2
[Completely Superseded]
e.
f.
g.
h.
i.
j.
k.
Supplies inventories are materials and supplies obtained or controlled as a result of
past transactions or events and that are for use in operations.
A prepaid item is an asset account reporting payments in advance for unreceived
goods or services acquired in exchange transactions. Prepaid items are for such items
as insurance and rent.
Capital assets are long-lived, tangible assets (for example, equipment, buildings,
land, and infrastructure) obtained or controlled as a result of past transactions or
events.
Governmental-type activities are those activities of a government that are carried out
primarily to provide services to citizens and that are financed primarily through taxes
and intergovernmental revenues.
Governmental funds are those funds generally used to account for and report on
governmental-type activities. Depending on the sources of financial resources and
the nature of the activities reported, governmental funds are classified into one of four
fund types: general, special revenue, debt service, and capital projects.
Account groups are self-balancing sets of accounts used to account for and report on
certain general fixed assets and certain general long-term debt4 associated with or
arising from the flow of financial resources measurement focus of governmental
fund operating statements.
Interperiod equity measurement is the measure of whether current-year revenues
were sufficient to pay for current-year services. A measure of interperiod equity
would show whether current-year citizens received services but shifted part of the
payment burden to future-year citizens or used up previously accumulated resources.
Conversely, such a measure would show whether current-year revenues not only were
sufficient to pay for current-year services, but also increased accumulated net
resources.
Background—The Governmental Environment
4. As required in the Standards section of this Statement, the measurement focus for
governmental fund operating statements should be the flow of financial resources
measurement focus. The operating results expressed using this measurement focus show
the extent to which financial resources obtained during a period are sufficient to cover
claims incurred during that period against financial resources. This measurement focus
considers financial resources only and uses an accrual basis of accounting. Therefore, the
flow of financial resources measurement focus does not include a periodic operating
charge such as depreciation for the using up of capital assets and is not intended to fully
accomplish a measure of cost of services. Rather, it measures the effects on financial
4Because of the requirements of the Standards section of this Statement, Appendix B refers to general longterm capital debt instead of general long-term debt in its definition of account groups.
3
[Completely Superseded]
resources of acquisitions and dispositions of capital assets and the issuance and repayment
of debt for capital purposes.
5. The measurement focus used to express an entity’s financial performance is
necessarily influenced by various factors, including its operating environment and the
needs of users of its financial reports. Significant environmental characteristics and the
needs of users of governmental financial statements are discussed in GASB Codification
Section 100, ―Objectives of Financial Reporting.‖5 The factors that have been considered
in establishing the flow of financial resources measurement focus for governmental fund
operating statements are:
a.
b.
c.
d.
The performance goals and measures of governmental-type activities.
The use of budgets and other financial controls.
The use of fund accounting.
Interperiod equity and the relationship between revenues and services.
The effects of these factors are discussed in the paragraphs that follow.
The Performance Goals and Measures of Governmental-Type Activities
6. The most important objective of governmental financial reporting, as presented in
Cod. Sec. 100.177, is accountability; that is, ―financial reporting should assist in fulfilling
government’s duty to be publicly accountable and should enable users to assess that
accountability.‖ Implicit in government’s duty to be accountable is the need to report on
whether certain goals have been achieved. Accounting, therefore, should help measure
progress toward those goals to provide a basis for evaluating performance.
7. The primary performance goal for private-sector business enterprises is generating
profit, a goal that is measurable in financial terms. The private-sector measurement focus,
therefore, provides information about financial performance by providing measures of
earnings and its components. Measures of earnings focus on particular operating periods
and measure the benefits from and the costs of operations and other transactions, events,
and circumstances that affect an enterprise during those particular periods.
5Further references to the GASB June 15, 1987 Codification of Governmental Accounting and Financial
Reporting Standards may be abbreviated. For example, Section 100, paragraph .101, would be referred to
as Cod. Sec. 100.101.
4
[Completely Superseded]
8. In contrast, the primary performance goal for state and local governmental entities is
providing optimum services for their citizens within the limits of available resources. This
is a complex, multidimensional goal that cannot be measured with a single measure of
performance such as earnings. In the absence of a single performance measure,
governmental entities should provide several measures for assessing accountability by, for
example, (a) showing whether revenues were raised in an amount sufficient to pay for the
services provided (interperiod equity), (b) demonstrating adherence to budgetary
authorizations and limitations and other finance-related legal or contractual provisions,
and (c) measuring service efforts, costs, and accomplishments. The measure of
interperiod equity is one measure of a governmental entity’s financial performance. To be
relevant to the governmental environment and the needs of users of governmental
financial statements, the measurement focus for governmental fund operations should
consider not only the measurement of interperiod equity, but also the roles played by
budgets and fund accounting, two significant control mechanisms that result from the
structure of government.
The Use of Budgets and Other Financial Controls
9. Financing is an important part of the governmental environment, particularly for
governmental-type activities. For those activities, the budget is the primary method of
directing and controlling the financing process. Although factors outside the actual budget
process may also affect governmental financing (such as the ability to issue short-term
revenue, tax, and bond anticipation notes), it is primarily through budgets that
governments establish performance goals for the period, especially financial performance
goals.
10. Because the budget is the primary means of establishing financial performance goals
for governmental-type activities, the focus and intent of budgets should be considered in
selecting a measurement focus for those activities. In addition, most users are familiar
with governments’ use of budgets to establish those goals and may not find financial
reports useful if they are prepared in completely different terms and contexts.
Focus of Governmental Budgets
11. Because most governmental budgets usually focus on financing a period’s
governmental-type activities, they are usually expressed in terms of financial resources,
showing the availability of existing financial resources, the anticipated inflows of new
5
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financial resources, and the anticipated outflows of financial resources. Budgets generally
do not include depreciation of capital assets; instead, they show outflows of financial
resources for the acquisition of capital assets and inflows from debt issued to acquire those
assets. The sources of financing for general fixed assets and the expenditures made for
them are important financial information that traditionally has been reported in
governmental fund operating statements.6 Governments also budget outflows of financial
resources to make debt service payments. Some governments may also budget inflows
and outflows for short-term borrowings against anticipated revenues, taxes, and bond
proceeds.
Budgetary and Financing Intent
12. Governmental budgets are often required by law to be ―in balance.‖ However, the
definition of in balance varies among governmental jurisdictions. For example, in some
cases, balance is achieved if cash on hand plus budgeted cash receipts equals budgeted
cash payments. In other cases, balance is achieved if available fund balance plus budgeted
revenues equals budgeted expenditures. In addition to balanced budget requirements,
some states have debt limitation laws that allow long-term debt to be issued only for the
acquisition of capital assets and require that debt to be repaid over a period no greater than
the probable useful life of the assets acquired.
13. Budgetary laws and practices are not consistent among governments. Also, because
the provisions of these laws are not always clear, the budgetary intent of balance often can
be avoided. A measurement focus for governmental-type activities that relies solely on an
individual entity’s budgetary laws and practices cannot provide financial statement users
with consistent, comparable financial reporting for an entity over time and among entities.
Because of the need for uniform financial reporting, the Board believes it is appropriate to
develop standards for performance measurements for governmental-type activities not so
much from the wording or application of specific budgetary laws, but from the intent of
budgetary laws in general.
14. As noted in Cod. Sec. 100.159, the intent of balanced budget and debt limitation
laws is to require financing and spending practices that enable governmental entities to
6Governments do not have owners to contribute to the capital base needed to establish and support an
ongoing operation; neither do they attempt to maintain capital by budgeting for revenues to cover the using
up of capital assets. Governments build and maintain their capital assets from existing resources, currentyear revenues, or long-term financing.
6
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avoid financial difficulty and to ―live within their means.‖ The general objective of these
laws is that the current-year citizens should not be able to shift the burden of paying for
current-year services to future-year taxpayers. In that section, the Board refers to this
concept as interperiod equity. It concluded that the measure of interperiod equity is
essential to accountability in governmental financial reporting and established it as an
objective of financial reporting. The Board’s emphasis on interperiod equity, then, is
based in part on the spirit of governmental balanced budget laws.
The Use of Fund Accounting
15. The diversity of governmental operations and the need to achieve and demonstrate
legal compliance and to enhance financial administration have resulted in an accounting
and financial reporting model that does not record and summarize all governmental
financial activities and balances in a single accounting entity. A governmental entity is a
combination of several separate and different fiscal and accounting entities (funds and
account groups), each reporting certain assets, liabilities, and equity or other balances and
the changes in them.
16. Three categories of fund types are used in governmental accounting: governmental,
proprietary, and fiduciary.7 Two account groups also are used in governmental
accounting: the General Fixed Assets Account Group (GFAAG) and the General
Long-Term Debt Account Group (GLTDAG). Historically, governmental funds have
been used to report the activities and balances related to the financing of governmentaltype activities, and the account groups have been used to maintain control and
accountability over certain capital assets and long-term liabilities associated with or
arising from the flow of financial resources measurement focus of governmental fund
operating statements.
17. State and local governmental entities use four types of governmental funds: general,
special revenue, debt service, and capital projects. Activities and balances are accounted
for in one of these fund types depending on the sources of financial resources, the nature
7Some governmental colleges and universities follow the specialized industry accounting and reporting
principles contained in the American Institute of Certified Public Accountants (AICPA) Industry Audit
Guide, Audits of Colleges and Universities, which uses different fund types from those required by
governmental accounting and financial reporting standards. GASB Codification Section 2600, ―Reporting
Entity and Component Unit Presentation and Disclosure,‖ paragraph .109, provides for the presentation of
this other reporting model in governmental financial statements through the use of discrete presentation.
7
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of the activities reported, and the need to maintain separate funds for legal compliance and
accountability purposes.
18. The GASB Research Report, The Needs of Users of Governmental Financial
Reports (October 1985), shows that financial report users want financial information
based on funds. This Statement has been developed within the context of fund accounting
and the existing funds structure for governmental financial reporting; the Board will
consider how funds should be reported (display), including funds structure, in its financial
reporting project.
19. Existing governmental accounting and financial reporting standards provide only
general guidance about which activities should be accounted for in which of the various
fund categories, particularly as to governmental versus proprietary. It allows governments
the flexibility to determine within present financial reporting options the measurement
focus that expresses the performance goal of a particular activity and to account for and
report on it accordingly. Other Board projects will examine various issues on whether
particular activities should be reported in particular fund categories. For purposes of this
Statement, however, the Board presumes that the activities being reported in governmental
funds are those financed primarily through taxes and intergovernmental revenues
(governmental-type activities), rather than through user charges.
Interperiod Equity and the Relationship between Revenues and Services
20. Measuring interperiod equity requires comparing the revenues obtained by the
governmental entity with a financial measure of the services it provides. Further, a
meaningful comparison requires that the two have some relationship that makes them
comparable. The methods used to measure net income for private-sector business
enterprises are suited to their environment in which revenues generally have a direct
relationship to expenses and generating profits is a financial performance goal. However,
this is not the case in government, especially for governmental-type activities.
21. In private-sector business enterprises, most revenues and expenses have a direct
relationship to each other; they can be matched. For example, a typical business
transaction involves a simultaneous recognition of the benefit (sales revenue) and sacrifice
(cost of goods sold) of providing a product, and the difference between the two is gross
profit. Of course, private-sector business enterprises have many costs that do not bear
such a direct relationship to revenues but can nevertheless be associated with a particular
8
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period on the basis of transactions or events taking place in that period or by allocation.
Costs that benefit a single period (such as for electricity, water, and other utilities) are
recognized as expenses in the period incurred. Costs that benefit several periods (such as
for prepaid insurance) are allocated to those periods on a systematic and rational basis.
Costs that provide no ―benefit‖ (such as for liability claims) are generally recognized as
expenses in the period an asset is impaired or a liability is incurred.
22. For most governmental activities, particularly governmental-type activities, there
ordinarily is no direct matching relationship between specific revenues and specific
services. That is, except for certain user charges and intergovernmental revenues intended
to pay for specific services, most governmental revenues are obtained from a variety of
taxes levied against taxpayers who do not necessarily receive services directly
proportionate to the taxes they pay. Nor do most revenues and services result from the
same transaction; taxes obtained from a particular form of taxation are used (together with
other resources) to pay for a variety of services.
23. Although specific revenues and specific services of governmental-type activities
generally bear no direct relationship to each other, they both can be related directly to
specific time periods. Because of this, revenues and services of governmental-type
activities can be related to each other in the aggregate based on those time periods. An
operating statement measurement focus that measures the relationship between aggregate
revenues and aggregate services within a particular time period, therefore, is appropriate
for measuring interperiod equity. The relationship of revenues and services to a specific
time period can best be expressed in financial reporting by using an accrual basis of
accounting. An accrual basis of accounting generally is necessary to measure interperiod
equity because it recognizes the effects of transactions or events when they take place (a
specific time period), regardless of when cash is received or paid.
24. The Board is aware that interperiod equity cannot be measured completely in the
operations of any individual governmental fund, because budgetary and fund accounting
9
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practices cause governmental activities to be spread among a number of funds.8 At the
same time, the Board recognizes the importance of funds. Many users of governmental
financial statements are concerned with activities reported in individual funds; in
particular, users are interested in the sources, uses, and balances of the general fund’s
financial resources. To ensure that each fund provides information that best serves the
objectives established in Cod. Sec. 100, the Board believes that measurements made in
each governmental fund should contribute to measuring interperiod equity as much as
possible. To achieve this, the activities of those funds should be measured on an accrual
basis.
Flow of Financial Resources Measurement Focus
25. Given the importance of the budget and other financing processes in the performance
goals of government, the use of fund accounting, and the objective of measuring
interperiod equity, the Board believes the measurement focus of governmental fund
operating statements should be on the extent to which financial resources obtained during
a period are sufficient to cover claims incurred during that period against financial
resources. This measurement focus considers financial resources only and uses an accrual
basis of accounting. The Board has adopted the term flow of financial resources for this
measurement focus.
26. The flow of financial resources measurement focus requires governmental funds to
recognize the effects of transactions or events on financial resources when they take place,
regardless of when cash is received or paid. Financial resources are cash, claims to cash
(for example, debt securities of another entity and accounts and taxes receivable), claims
to goods or services (for example, prepaid items), consumable goods (for example,
supplies inventories), and equity securities of another entity obtained or controlled as a
result of past transactions or events.
8Even in the aggregate, the governmental funds cannot completely measure interperiod equity. This is
because the governmental funds do not report all the activities and balances of a governmental entity.
Further, measuring interperiod equity may require current-year services to be defined to include some charge
for the financial effect of using up (or the decline in service capacity of) capital assets. However, other
factors may make including such a measure in results of operations not meaningful or even misleading. The
Board’s project on capital assets will address whether, how, in what amounts, and for which capital assets
such measures should be reported in governmental financial statements, in other than governmental funds,
without duplicating capital asset acquisition or debt service expenditures.
10
[Completely Superseded]
Operations versus Financial Position Emphasis
27. It is possible that one potential treatment of transactions or events may be more
appropriate for measuring results of operations, and an alternative treatment may be more
appropriate for measuring assets and liabilities. For example, valuing inventories on a
last-in, first-out (LIFO) method provides a measure of cost of goods sold that is closer to
current value, whereas a first-in, first-out (FIFO) method provides a measure of the asset
(inventory) that is closer to current value. Valuing inventories for financial reporting
purposes depends on whether the emphasis of reporting is on results of operations or on
financial position. The measure of interperiod equity, a measure of the extent to which
current-year revenues were sufficient to pay for current-year services, is inherently
oriented to results of operations. Further, the concept of interperiod equity is based on
governmental performance goals and the intent of balanced budget laws, both of which
focus primarily on operations for the period rather than on financial position. Therefore,
accounting standards based on a concept of measuring interperiod equity emphasize
results of operations.
Expenditure Recognition and Measurement Based on Funding Methods
28. The Board will provide the detailed criteria for recognition and measurement of
pensions in a separate Statement. The Board also intends to reexamine recognition and
measurement of compensated absences. In developing those Statements, the Board
intends to apply the flow of financial resources measurement focus. GASB Statement No.
10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues
(November 1989), provides guidance on recognition and measurement of risk financing
and related insurance transactions using that measurement focus. Generally, the Board
believes that recognizing expenditures when the underlying transactions or events take
place and measuring those expenditures using methods that are already generally accepted
in private-sector business enterprise financial reporting will help accomplish the objective
of measuring interperiod equity. However, the Board believes that may not always be the
case. In some situations, it may be appropriate to recognize transactions or events as
affecting more than just the period in which they take place. Furthermore, in other
situations, measurements other than those used in private-sector business enterprise
financial reporting may be needed to demonstrate interperiod equity in governmental
financial reporting.
11
[Completely Superseded]
29. As discussed earlier, the budget is the primary method used by governmental entities
to direct and control the financing process for governmental-type activities. The Board
recognizes that some budgetary practices fail to attribute expenditures to the appropriate
period, as when funds are budgeted entirely on a cash basis, making it necessary to use
accounting techniques (such as accruals) to measure the extent to which interperiod equity
has been achieved. Therefore, the accounting recognition of transactions should consider
budgetary methods, but it should not be driven by them.
30. On the other hand, other budgetary practices may be designed specifically to achieve
interperiod equity. For example, by using actuarial funding methods to determine
budgetary pension expenditures, governments attempt to provide appropriate amounts for
future cash outflows arising from current service. The Board intends to explore whether
budgetary funding methods designed to achieve interperiod equity for certain types of
expenditures meet the test of being ―systematic and rational‖ and, therefore, warrant use
for expenditure recognition and measurement purposes. The Board may consider this
approach in situations involving long-term liabilities that are complex and uncertain, that
are paid either over a long period of time or long after their incurrence, or for which a
period of transition is warranted, such as pensions, other postemployment benefits, claims
and judgments, compensated absences, and capital debt service. The Board expects this
approach will be limited to specific transactions or events as identified by the Board and
should not be applied unless specifically provided for in a Board pronouncement.
Treatment of Operating Debt
31. The flow of financial resources measurement focus does not recognize all sources
and uses of financial resources in the operating statement. This Statement makes a
distinction between debt issued for capital purposes and debt issued to finance operations
or in anticipation of revenues (operating debt). This is because debt issued to finance
operating deficits or operating cash needs provides no benefit to future-year citizens. The
issuance of operating debt should not be recognized in the operating statement as an
inflow of financial resources. Also, repayments of that debt principal should not be
recognized in the operating statement as an outflow of financial resources. An operating
statement based on the measure of interperiod equity within the context of financial
resource flows should report the extent to which the entity’s operating expenditures were
covered by its revenues. Interperiod equity cannot be measured (and should not be
12
[Completely Superseded]
reported as having been achieved) by reporting borrowings for operating purposes as an
inflow of financial resources.
STANDARDS OF GOVERNMENTAL ACCOUNTING AND FINANCIAL
REPORTING
Applicability of This Statement
32. The requirements of this Statement apply to all state and local governmental entities
that report using governmental funds and account groups or expendable trust funds as
described in Codification Section 1300, ―Fund Accounting,‖ paragraph .104a, c, and d.9 A
future Statement will provide instructions to show how the provisions of this Statement
will supersede portions of and be integrated into the Codification.
Flow of Financial Resources: General Principles
33. Governmental funds are those funds generally used to account for and report on
governmental-type activities. The operating statements for these funds measure the extent
to which financial resources obtained during a period are sufficient to cover claims
incurred during that period against financial resources. This flow of financial resources
measurement focus considers financial resources only and uses an accrual basis of
accounting; accordingly, it recognizes the effects of transactions or events on financial
resources when they take place, regardless of when cash is received or paid. As discussed
in paragraph 37, account groups are used to report certain capital assets and certain capital
debt associated with governmental-type activities.
34. Financial resources are cash, claims to cash (for example, debt securities of another
entity and accounts and taxes receivable), claims to goods or services (for example,
prepaid items), consumable goods (for example, supplies inventories), and equity
securities of another entity obtained or controlled as a result of past transactions or events.
35. Transactions or events may take place in one period and result in cash receipts or
payments in either the same period or another period. As applied to specific transactions
9Some governmental colleges and universities report their transactions and balances in governmental funds
and account groups using NCGA Statement 1, Governmental Accounting and Financial Reporting
Principles. This Statement applies to those governmental colleges and universities. However, this
Statement does not apply to those governmental colleges and universities that follow the specialized industry
accounting and reporting principles contained in the AICPA Industry Audit Guide, Audits of Colleges and
Universities.
13
[Completely Superseded]
in this Statement, transactions and events that affect financial resources should be
recognized when they take place, regardless of when cash is received or paid.
36. Revenues, operating expenditures, and interfund operating and residual equity
transfers are the result of transactions or events that affect financial resources. Also, the
acquisition, disposition, and long-term financing of capital assets and the long-term
financing of certain nonrecurring projects or activities that have long-term economic
benefit10 are transactions that affect financial resources. However, as discussed in
paragraph 95, the debt financing of operations is not reported in the operating statement as
transactions that affect financial resource flows.
37. The General Fixed Assets Account Group (GFAAG) and the General Long-Term
Debt Account Group (GLTDAG) are self-balancing sets of accounts used to account for
and report on certain capital assets and certain capital debt associated with and arising
from governmental-type activities (general fixed assets and general long-term capital debt,
respectively). Their use is associated with or arises from the flow of financial resources
measurement focus of governmental fund operating statements.
Revenues
38. Governmental fund revenues usually result from taxation and from other
nonexchange transactions and events, such as fines, fees for licenses and permits, and
donations. Governmental fund revenues also result from exchange transactions—such as
charges for services, investments, and operating leases. This section gives guidance for
recognizing and measuring governmental fund revenues.
39. Receivables usually are reported at the same time that revenue is recognized.
However, amounts that are due before revenue recognition criteria are met should be
reported as receivables and deferred revenue. Cash collected before revenue recognition
criteria are met also should be reported as deferred revenue. Revenues and receivables
should be reduced by an appropriate allowance for amounts estimated to be uncollectible.
10See footnote 30.
14
[Completely Superseded]
Taxes
40. Taxes are compulsory payment requirements imposed by governments on their
citizens and other taxpayers to obtain the resources needed to provide services. From an
accounting perspective, two factors need to be considered in recognizing tax revenue:
a.
b.
The underlying transaction or event. One factor to be considered in recognizing tax
revenue is the nature of the taxable transactions or events. A tax can be based on
particular transactions or events, or it can be based on transactions or events that
take place over or relate to a period of time. Sales tax is an example of a tax that is
based on particular transactions or events (retail sales). Income and property taxes
are examples of taxes that are based on transactions or events that take place over a
period of time (income earned over the course of a year, and the budgetary [fiscal]
period for which the property tax is levied, respectively).
The demand for taxes. The fact that taxation is confiscatory also should be
considered in recognizing revenue. To obtain tax resources, a government must
demand the payment. A government’s demand for taxes is evidenced by imposing a
due date for payment. One of the criteria for revenue recognition is that the taxes
must be due on or before the end of the period. However, for taxpayer-assessed
taxes (for example, income and sales taxes), governments allow an ―administrative
lead time‖ to permit taxpayers to calculate the taxes they owe as of a particular prior
date. For example, governments may allow merchants until July 15 to close their
books for the quarter ending June 30 and to calculate and report the sales tax owing
for that period. Allowing this ―administrative lead time‖ does not disturb the fact
that the taxes have been demanded as of June 30.
General Recognition Criteria
41. Tax revenue should be recognized if both of these criteria are met, regardless of
when cash is received:
a.
b.
The underlying transaction or event has taken place.
The government has demanded the taxes from the taxpayer by establishing a due
date on or before the end of the period. However, taxpayer-assessed taxes with a
due date within two months after the end of the period to allow for ―administrative
lead time‖ should be considered as having been demanded as of the end of the
period.
Delinquency accrual and taxes discovered through audit
42. Tax revenue accruals should include an accrual for delinquent taxes, that is, taxes
that meet the above criteria but that are not received when due. The delinquency accrual
for taxpayer-assessed taxes should consider only those amounts that taxpayers are late in
15
[Completely Superseded]
reporting or remitting. The revenue from delinquent taxes should be calculated based on
amounts that are (a) received before financial statements are issued, (b) reported but not
received before financial statements are issued, and (c) expected to be reported after
financial statements are issued based on the history of delinquencies that ―trickle in‖ after
financial statements are issued.11 Amounts reported based on historical trends should be
adjusted for tax law and other changes that would distort historical trends.
43. The delinquency accrual should not include unreported or underreported taxes
arising from taxpayer noncompliance with reporting or other tax laws and that the
government expects to discover through taxpayer audit. Taxes that are discovered through
government audit should be recognized in the current period only if assessed (billed)
before financial statements are issued.
Final settlements
44. Additional payments and refunds in final settlement of income and other taxpayerassessed taxes should be recognized in revenue if the settlement relates to a taxable period
ending on or before the government’s fiscal year-end and the final settlement is due within
two months after the government’s fiscal year-end. These settlements are referred to in
this Statement as current final settlements.12 The revenue from current final settlements
should be calculated based on the additional payments and refunds that are (a) received or
paid before financial statements are issued, (b) reported but not received or paid before
financial statements are issued, and (c) expected to be reported after financial statements
are issued based on the history of delinquent final settlement filings that ―trickle in‖ after
financial statements are issued.13 Estimates of additional payments and refunds for future
11As a practical matter, governments establish a cut-off date for obtaining actual information for accruals.
Therefore, the history-based delinquency accrual would be the amounts expected to be reported after the cutoff date for preparing financial statements.
12The following is an example of a current final settlement. Assume a state with a June 30 fiscal year-end.
Individuals pay state income taxes based on a calendar year, with a final settlement due date of April 15.
The final settlement of calendar-year 19X3 taxes, which is due April 15, 19X4, is a current final settlement
during the state’s fiscal year ending June 30, 19X4.
13The history-based accrual estimate should be based on such things as, for example, the history of final
settlement additional payments and refunds in relation to withholding and estimated payment receipts. This
accrual estimate should be adjusted for tax law and other changes, such as changes in tax rates or economic
conditions, that would distort historical trends.
16
[Completely Superseded]
final settlements14 of income and other taxpayer-assessed taxes should not be recognized
in revenue of the current period. However, revenue should be reduced and a liability
reported for structural overdemand as discussed in the following paragraph.
Revenue reduction for overdemand
45. If the government has structured an overdemand for tax payments (for example,
through an excess payment requirement built into the income tax withholding or estimated
payments system), it should reduce revenue for the effect of the overdemand for those
taxes that are subject to future final settlement. The amount of revenue reduction for
structural overdemand should be reported as a liability. Additional revenue should not be
recognized for structural underdemand through withholding or estimated payments.
Interest, penalties, and uncollectible amounts
46. Interest on unpaid taxes should be recognized as revenue as it accrues over time, and
penalties should be recognized as revenue when they are assessed.
47. Tax revenue and receivables should be reduced by an appropriate allowance for
uncollectible amounts.
Sales Taxes
48. Sales tax revenue should be recognized when the sale takes place, provided the
government has demanded the taxes, regardless of when cash is received by the taxing
government. If taxpayers are allowed administrative lead time to calculate their tax
liability for sales that take place at or before the end of the period, taxes should be
considered as demanded as of the end of the period if the due date is within two months
after the end of the period. (An illustration of the calculation of sales tax revenue is
provided in Appendix C.) Sales tax revenue should include not only amounts that are
received when due, but also those amounts that are delinquent. Details about recognizing
and measuring the sales tax revenue accrual, receivables, and refund liabilities follow.
14Future final settlements are those final settlements that (a) relate to a taxable period ending after the
government’s fiscal year-end or (b) relate to a taxable period ending on or before the government’s fiscal
year-end but for which the final settlement is due more than two months after the government’s fiscal yearend. As an example of a future final settlement, assume a state with a June 30 fiscal year-end. Individuals
pay state income taxes based on a calendar year, with a final settlement due date of April 15. The final
settlement of calendar-year 19X4 taxes, which is due April 15, 19X5, is a future final settlement during the
state’s fiscal year ending June 30, 19X4.
17
[Completely Superseded]
a.
b.
c.
d.
e.
Delinquency accrual. The accrual for delinquent sales taxes should be based on
known data (current sales taxes reported but not received, or current amounts
received in cash after the due date) and historical trends (amounts expected to be
reported after financial statements are issued based on the history of delinquencies
that ―trickle in‖ after financial statements are issued). Amounts reported based on
historical trends should be adjusted for tax law and other changes that would distort
those trends.
Audit adjustments for unreported sales taxes. Governments often discover sales
taxes owing for prior or current periods through audits of the taxpayers. Revenue
should be recognized in the current period for assessments (billings) made during
the period as well as for those made after the period and before financial statements
are issued. Audit adjustment revenue should be based on actual amounts assessed
against individual taxpayers, not on estimates or historical trends.
Refund liabilities. Usually, sales taxes are not subject to a final settlement cycle.
However, governments should report a liability and reduce revenue for any sales
taxes expected to be refunded.
Interest and penalties on unpaid taxes. Interest on unpaid taxes should be
recognized as revenue as it accrues over time, and penalties should be recognized as
revenue when they are assessed.
Uncollectibles. Sales tax revenue and receivables should be reduced by an
appropriate allowance for uncollectible amounts.
Income Taxes
49. Income tax revenue, including both individual and corporate income taxes, should be
recognized in the period in which the related income is earned by the taxpayer, provided
the government has demanded the taxes, regardless of when cash is received by the taxing
government. If taxpayers are allowed administrative lead time to calculate their tax
liability for income earned at or before the end of the period,15 taxes should be considered
as demanded as of the end of the period if the due date is within two months after the end
of the period. (An illustration of the calculation of income tax revenue is provided in
Appendix C.) Income tax revenue should include not only amounts that are received
when due, but also those amounts that are delinquent. Details about recognizing and
measuring the income tax revenue accrual, receivables, and refund liabilities follow.
a.
Delinquent withholdings and estimated payments. The accrual for delinquent
withholdings and estimated payments should be based on known data and historical
trends adjusted for tax law and other changes that would distort those trends. The
delinquency accrual based on known data should be calculated based on delinquent
taxes that are (1) received before financial statements are issued and (2) reported but
15The administrative lead time for income taxes includes the time allowed employers to remit amounts
withheld from employees’ wages.
18
[Completely Superseded]
b.
c.
d.
e.
f.
not received before financial statements are issued. The delinquency accrual based
on historical trends should provide for delinquent taxes that history shows will
―trickle in‖ after financial statements are issued.
Final settlements. Current final settlements should be recognized in revenue and
should be calculated based on additional payments and refunds (1) received or paid
before financial statements are issued, (2) reported but not received or paid before
financial statements are issued, and (3) expected to be reported after financial
statements are issued based on the history of delinquent final settlement filings that
―trickle in‖ after financial statements are issued. Current final settlements are those
that relate to a taxable period ending on or before the government’s current fiscal
year-end and that are due within two months after that year-end. Estimates of
additional payments and refunds for future final settlements of income taxes should
not be recognized in revenue of the current period. However, revenue should be
reduced and a liability reported for structural overdemand, as discussed below.
Revenue reduction for overdemand. Revenue from income taxes that are subject to
a future final settlement should be reduced to the extent the government has
structured an overdemand for tax payments, for example, through an excesspayment requirement built into the income tax withholding or estimated payments
system. The amount of revenue reduction for structural overdemand should be
reported as a liability. For example, assume a government requires calendar-year
corporate taxpayers to pay 70 percent of their estimated income tax liability as of the
government’s June 30 fiscal year-end. Revenue from estimated payments from
these taxpayers should be reduced by the 20 percent structural overdemand. As
another example, assume a government’s system is designed to withhold 10 percent
more than an individual’s actual calendar-year tax liability based on a properly
completed withholding form. For the government’s fiscal year ending June 30,
19X4, the government should reduce revenue from withholdings for wages paid
from January 1, 19X4 through June 30, 19X4 by the 10 percent structural
overdemand. (Revenue from withholdings for wages paid July 1, 19X3 through
December 31, 19X3 should not be similarly reduced because the overwithholdings
for that period already will have been accounted for through the current final
settlement.) Revenue should not be recognized for structural underdemand through
withholding or estimated payments.
Audit adjustments for unreported income taxes. The government may discover
income taxes owing for prior or current periods through audits of taxpayers.
Revenue from income taxes discovered through audits should be recognized in the
current period for assessments made during the period as well as for those made
after the period and before financial statements are issued. That revenue should be
based on actual amounts assessed against individual taxpayers, not on estimates or
historical trends.
Interest and penalties on unpaid taxes. Interest on unpaid taxes should be
recognized as revenue as it accrues over time, and penalties should be recognized as
revenue when they are assessed.
Uncollectibles. Income tax revenue and receivables should be reduced by an
appropriate allowance for uncollectible amounts.
19
[Completely Superseded]
Taxpayer-Assessed Taxes Administered or Collected by Another Government
50. The criteria in this Statement for measuring and recognizing tax revenues apply
regardless of whether the taxing government also administers and collects the taxes.
However, some sales, income, and other taxpayer-assessed taxes are imposed by one
government and administered or collected by another, and the taxing government is not
able to obtain the accrual information it needs from the administering or collecting
government. If so, the taxing government should recognize revenue for the period equal
to (a) cash received during the period plus (b) cash received within one month after the
end of the period (less amounts recognized as revenue in the previous period). Cash
received more than one month after the end of the period also should be recognized as
revenue if reliable information is consistently available to identify the amounts applicable
to the current period.
Property Taxes
51. When a property tax levy is made, it is to finance the budget of a particular period.
Property (or ad valorem) tax revenue should be recognized in the budgetary (fiscal) period
for which the taxes are levied, provided the government has demanded the taxes on or
before the end of the period, regardless of when cash is received by the taxing
government. The demand date for property taxes is the date those taxes are due. For
purposes of recognizing revenue and reporting receivables, the due date is the last day
before penalties or interest begin to accrue. In those cases in which the budgetary period
for which levied and the property tax due date do not take place in the same fiscal year,
revenue should be recognized and receivables reported as follows.
a.
b.
Property taxes that are due after the budgetary period for which levied should be
recognized as revenue in the period due.
Property taxes that are received or receivable before the budgetary period for which
levied should be reported as deferred revenue. Property tax receivables should be
reported when the taxes become due.
Property tax revenue, receivables, and deferred revenue should be reduced by an
allowance for uncollectible amounts. (See Appendix C for illustration of the calculation
of property tax revenue.)
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[Completely Superseded]
52. The entity’s property tax calendar should be disclosed in the notes to financial
statements. This disclosure should include levy dates, lien dates, due dates, and past-due
or delinquent dates.
Other Taxes
53. Revenues, receivables, and refund liabilities for other taxes should be recognized on
an accrual basis using the general and specific guidance above.
Other Nonexchange Revenues
General Recognition Criteria
54. Other nonexchange revenues result from nonexchange transactions and events other
than taxes, such as fines, fees for licenses and permits, and donations. Except as provided
below, entities should recognize other nonexchange revenues when the underlying event
takes place and the government has an enforceable legal claim to the amounts, regardless
of when received.
Fines
55. Fines are monetary penalties imposed by governments against those that commit
statutory offenses or violate administrative rules. Revenue from fines should be
recognized in the period the entity has an enforceable legal claim to the amounts,
regardless of when cash is received. Conditions that constitute an enforceable legal claim
for fines include (a) the date by which an individual may contest a court summons expires
and the fine is automatically imposed, (b) the offender pays the fine before a court date, or
(c) a court imposes the fine. Appropriate allowances should be made for uncollectible
fines and fines expected to be waived through an appeals process.
56. If the accrual-basis recognition of fines as provided in paragraph 55 is not
practicable, revenue from fines may be recognized on a cash basis.
Licenses and Permits
57. Citizens and others pay fees for licenses and permits for the privilege of engaging in
a regulated activity. Often, the fee is intended to cover a privilege granted to cover a
particular period of time. Because the grantee of a license or permit generally has no legal
right to exercise the privilege until the fee is paid, it is considered that, for purposes of
21
[Completely Superseded]
revenue recognition, a government’s enforceable legal claim to license and permit fees
arises when the fee is paid, provided the government has no obligation to refund amounts
paid. Therefore, unless the entity wants to allocate the revenue over a period based on the
criteria in paragraph 58, fees from licenses and permits should be recognized as revenue
when received, provided there is no obligation to refund the amount.
58. In some cases, a government uses the fees from a license (or permit) to finance
expenditures associated with the regulated activity during the license period. For example,
a state may use annual professional licensing fees to finance the regulation of the
professions during the same license year. In certain situations a government may want to
defer and allocate the revenue from these fees over the license period because, for
example, the revenue and expenditures are reported in a separate special revenue fund and
the license fee is due in the period preceding the license period or the fee is for more than
one fiscal period. In these cases, fees received should be deferred and recognized as
revenue over the license period.
Donations
59. For purposes of this Statement, donations16 are defined as voluntary contributions of
resources to a governmental entity by a nongovernmental entity.17 Donations may be
financial resources, such as cash or securities, or capital assets, such as land or buildings.
Revenue from donations of financial resources should be recognized when the entity has
an enforceable legal claim to the donation and it is probable the donation will be received,
regardless of when the financial resources are received. Revenue should be measured at
the estimated fair value of the financial resource donated. Except as discussed in the next
paragraph, governments should not report revenue from the donation of a capital asset.
60. If an entity receives a donation of a capital asset and intends to sell the asset
immediately, revenue should be recognized in the period the asset is donated, and the
capital asset should be reported in the fund reporting the revenue as ―Assets held for sale.‖
Intent to sell should be evidenced by a sale of or contract to sell the capital asset before
financial statements are issued. Revenue should be measured at the amount at which the
16The recognition criteria for donations should not be applied to pledges for future transfers of resources.
Revenue recognition requirements for pledges will be established in another Board project.
17A voluntary contribution of resources between governmental entities is an intergovernmental transfer
(grant). This guidance is not intended to apply to contributions from one governmental agency or unit to
another.
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[Completely Superseded]
capital asset is sold or contracted to be sold. If the entity does not intend to sell the
donated capital asset immediately or does not meet the intent criterion stated above, the
donation should not be reported in the operations of the governmental funds. Instead, the
receipt of the asset should be reported as a direct addition to the GFAAG at the estimated
fair value of the asset donated, subject to the entity’s normal capitalization policies.
Subsequent sale of the capital asset should be reported as an other financing source in
accordance with paragraph 70.
Other Nonexchange Revenues Administered or Collected by Another Government
61. The criteria in this Statement for measuring and recognizing other nonexchange
revenues apply regardless of whether the reporting entity also administers and collects the
amounts. However, some fines, fees for licenses and permits, and other nonexchange
revenues are administered or collected by one government on behalf of another, and the
reporting government is not able to obtain the accrual information it needs from the
administering or collecting government. If so, the reporting government should recognize
revenue for the period equal to cash received during the period. Cash received after the
end of the period also should be recognized as revenue (less amounts recognized as
revenue in the previous period) if reliable information is consistently available to identify
the amounts applicable to the current period.
Exchange Revenues
General Recognition Criteria
62. Governmental fund revenues from exchange transactions—such as from charges for
services, investments, and operating leases—should be recognized when earned,
regardless of when cash is received. When earned means when the entity has done what it
must do to complete its side of the transaction.
Charges for Services
63. Citizens or others pay user fees as charges for specific goods or services. Revenues
from user fees should be recognized in the period earned, regardless of when cash is
received. Revenues from some user fees (for example, golf and swimming fees) are
earned at the time they are collected. Revenues from other user fees, however, are not
earned at the time they are collected. For example, a monthly garbage removal fee may be
received in advance of the month of service. If so, the entity should report the receipt as
23
[Completely Superseded]
deferred revenue until the service is provided. In other cases, the entity may provide the
service before the fee is charged, for example, for snow removal. In these cases, the entity
should recognize fee revenue and receivables when the service is performed.
Investment Gains, Losses, and Income
64. Investment gains and losses should be recognized when an investment is sold.
Investment income (interest and dividends) should be recognized in the period earned.
Equity securities of governmental funds generally should be measured and reported at
cost, and debt securities at cost or amortized cost.18 However, if the market value of either
type of investment declines below its carrying amount and that decline is considered to be
other than temporary,19 an estimated loss should be recognized in the fund’s results of
operations and as a reduction of the carrying amount of the investment. Further, if the
market value of an investment declines below its carrying amount and it is probable a loss
will be realized in the future (for example, because the entity expects to sell the
investment to meet its cash flow needs), an estimated loss should be recognized in the
fund’s results of operations and as a reduction of the carrying amount of the investment.
In both of these situations,20 the reduced carrying amount should become the investment’s
new cost basis; recoveries in the price of the investment, if any, should not be recognized
until the investment is sold or matures.
65. There will be cases, however, in which a valuation method other than cost or
amortized cost should be used to measure and report investment securities. Generally, this
involves situations in which the assets are specifically associated with liabilities to
individuals, private organizations, and other governments, and the contract with those
other parties requires that the assets be valued using another generally accepted valuation
method. For example, if the pool agreement governing a state government’s management
of an investment pool for its local governments provides for the valuation of the pool’s
investments at market value, those investments should be valued at market in the state’s
18Codification Section I50, ―Investments, including Repurchase Agreements,‖ paragraph .164, requires note
disclosure of the market value of investments.
19An other-than-temporary decline in the market value of a security would arise from situations affecting the
issuer and the market price of its securities, such as default or bankruptcy.
20These requirements are applications of FASB Statement No. 5, Accounting for Contingencies, which
requires, in part, that an estimated loss be recognized if (a) information available before financial statements
are issued indicates that it is probable that an asset had been impaired at the date of the financial statements,
(b) one or more future events will confirm the fact of the loss, and (c) the amount of the loss can be
reasonably estimated.
24
[Completely Superseded]
financial statements. Similarly, participating local governments should measure and
report their investment in the pool at the value reported by the pool.
66. Investments in mutual funds should be measured and reported at redemption value,
that is, the account balance reported to the entity by the fund. Changes in the mutual fund
account balance (net asset value) from other than deposits and withdrawals should be
recognized as investment income in the period posted by the mutual fund to the entity’s
account.
67. Often, gains, losses, and income from investments reported by one fund become the
assets of another fund because of legal or contractual provisions. In these cases, the
accounting treatment should be based on the specific language of the legal or contractual
provision.
a.
b.
If the legal or contractual provision requires a transfer of the amounts to another
fund, a transfer should be reported. For example, if state law requires that the
earnings on the investments of a nonexpendable trust fund be transferred to an
expendable trust fund, the amounts should be recognized as gains, losses, and
income in the nonexpendable trust fund, and an operating transfer should be used to
report the transfer to the expendable trust fund.
If the legal or contractual provision simply requires that the investment gains, losses,
and income become the assets of a fund other than the one reporting the investment,
no transfer of resources should be reported. Instead, the amounts should be
recognized as gains, losses, and income in the recipient fund. The fact that the
amounts are from investments reported in other funds should be disclosed in the
notes to financial statements. For example, if state law requires that all amounts
earned by all investing activities of the state treasurer should accrue as revenue to
the general fund, the gains, losses, and income on those investments should be
recognized in the general fund, and that fact should be disclosed.
If, however, amounts become the assets of another fund for reasons other than legal or
contractual provisions, gains, losses, and income should be recognized in the fund
reporting the investments. An operating transfer should be used to report the transfer of
those amounts to the recipient fund.
Operating Leases
68. Revenues result from operating leases. Capital assets held for operating lease and
reported in the GFAAG should be reported in a separate caption. Codification Section
L20, ―Leases,‖ provides guidance for distinguishing between capital and operating leases.
25
[Completely Superseded]
If the operating lease agreement requires lease payments to be made on a level-payment
basis, revenue for operating leases should be recognized as it accrues over the lease term
and should be measured in accordance with the terms of the lease agreement. If the lease
agreement specifies scheduled rent increases, the lease transaction should be accounted for
as provided in GASB Statement No. 13, Accounting for Operating Leases with Scheduled
Rent Increases (May 1990), and revenue should be recognized using an accrual basis of
accounting.
Other Financing Sources
69. Financial resources obtained from issuing general long-term capital debt, the sale or
capital lease of capital assets, and interfund operating transfers-in should be reported as
other financing sources.
Paragraphs 85 through 98 provide guidance on reporting
financing transactions. Codification Section 1600, ―Basis of Accounting,‖ paragraph .126,
and Section 1800, ―Classification and Terminology,‖ paragraphs .106 and .107, provide
guidance on reporting operating transfers.
Capital Leases and Sales of Capital Assets
70. Capital leases and sales of capital assets should be reported as other financing
sources. Capital assets held for capital lease or sale and reported in the GFAAG should be
reported in a separate caption. The other financing source from a capital lease should be
recognized at the inception of the lease term. Cod. Sec. L20 provides additional guidance
for recognizing and reporting leases. The other financing source from a capital asset sale
should be recognized when the asset is sold.
71. If an entity receives a long-term note for the sale of a capital asset in an arm’slength, exchange transaction,21 there is a general presumption that the note’s stated
interest rate is fair and adequate unless (a) no interest rate is stated, (b) the stated rate is
unreasonable,22 or (c) the face amount of the note differs materially from the cash sales
price of the capital asset or the market value of the note. If (a), (b), or (c) exists, the entity
should report the other financing source from the sale of the capital asset at the fair value
21Paragraphs 71, 92, and 98 are not intended to apply to other than arm’s-length, exchange transactions (for
example, if a state government, acting in the public interest, sells a building to a political subdivision at less
than fair value). As noted in footnote 24, the Board currently is conducting research on the accounting for
certain nonexchange transactions.
22A stated interest rate would be unreasonable if it does not approximate the rate that an independent
borrower and lender would have negotiated in a similar transaction.
26
[Completely Superseded]
of the asset or at the market value of the note, whichever is more clearly determinable.23
A receivable equal to the face amount of the note should be reported in the governmental
fund reporting the other financing source. The difference between the amount of the other
financing source and the face amount of the note should be reported in the fund as a
premium or discount. However, the receivable may be reported net (face amount adjusted
for the unamortized premium or discount) in the fund’s balance sheet. Interest revenue on
the note should be recognized as the interest accrues, based on the note’s effective
interest rate; that is, the discount or premium should be amortized and reported as a
component of interest revenue using the interest method. Principal payments on the note
should be used to reduce the note receivable, with no effect on operations.
Residual Equity Transfers-In
72. Financial resources obtained from residual equity transfers-in should be reported as
additions to beginning fund balance, as required in Cod. Sec. 1800.106 and .107.
Expenditures
73. Governmental fund expenditures include operating, capital, and debt service
expenditures. Unless otherwise specified, expenditures should be recognized when
transactions or events that result in claims against financial resources take place,
regardless of when cash is paid. Paragraphs 74 through 82 discuss specific recognition
criteria for operating and capital expenditures. Paragraph 97 discusses debt service
expenditures.
Operating Expenditures
74. Operating expenditures result from claims against financial resources that arise from
transactions or events other than capital asset acquisitions, debt service, operating and
residual equity transfers-out, and other transactions reported as other financing uses.
23In the absence of an established exchange price for the capital asset or evidence of the market value of the
note, the present value of the note is determined by discounting all future payments using an imputed rate of
interest. The imputed interest rate used should be one that approximates the rate that an independent
borrower and lender would have negotiated in a similar transaction.
27
[Completely Superseded]
Governmental fund operating expenditures result from exchange and nonexchange24
transactions or events. Operating expenditures that arise from exchange transactions
generally should be recognized when the transactions that result in claims against financial
resources take place, regardless of when cash is paid. For example, expenditures for
salaries should be recognized in the period employees perform the work; expenditures for
utilities should be recognized in the period the utility services are used.
Prepaid Items
75. Prepaid items are payments in advance of the receipt of goods or services in
exchange transactions. Prepayments are usually made for items such as insurance and
rent. They are, in substance, a conversion of cash to another type of financial resource that
will be used to satisfy future liabilities as they arise. Prepaid items should be reported as
financial resources at the time of prepayment, and expenditures for prepaid services
should be recognized when the related services are received. This recognition method is
known as the consumption method.
Supplies Inventories
76. Materials and supplies to be used in operations should be reported as financial
resources when acquired, and recognized as expenditures when used. This recognition
method is known as the consumption method. When acquired, materials and supplies are,
in substance, a conversion of cash to another type of financial resource that will be used
up in providing service in a future period.
Compensated Absences25
77. Employee absences for which employees will be paid, such as vacation, sick leave,
sabbatical leave, and holidays, are compensated absences. Compensated absences for
24The Board currently is conducting research on accounting for operating expenditures resulting from
certain nonexchange transactions. Recognition and measurement standards for these transactions will be
exposed for public comment and issued separately. Although the effective date of those standards is
expected to be the same as for this Statement, the Board does not intend to delay the effective date of this
Statement if those standards have not been completed.
25As explained in paragraphs 215 and 216 of the Basis for Conclusions, the Board intends to reconsider
how to recognize and measure compensated absences expenditures using the flow of financial resources
measurement focus and an accrual basis of accounting before this Statement becomes effective.
28
[Completely Superseded]
other than sick leave26 should be recognized as expenditures when the benefits are earned
by the employees. An employer should recognize an expenditure for future compensated
absences for other than sick leave when all of these conditions are met:
a.
b.
c.
d.
The employees’ rights to receive compensation for future absences are attributable
to services already rendered.
The rights are accumulating27 or vesting.28
Payment of the compensation is probable.
The amount can be reasonably estimated.
If an employer meets conditions a, b, and c and does not recognize an expenditure because
condition d is not met, the fact that an expenditure has not been recognized should be
disclosed in the notes to financial statements.
78. An expenditure accrual for earned sick leave should be made only if the benefit is
vesting. Compensated absences for vesting sick leave should be recognized as
expenditures when they are earned by the employees if (a) the employees’ rights to receive
compensation for sick leave are attributable to services already rendered, (b) payment of
the compensation as a termination benefit is probable, and (c) the amount can be
reasonably estimated. Therefore, an accrual for earned sick leave should be made only to
the extent it is probable the benefit will be used as a cash payout at termination rather than
for an employee’s absence due to illness. If an employer does not recognize an
expenditure for vesting sick leave because the amount cannot be reasonably estimated, the
fact that an expenditure has not been recognized should be disclosed in the notes to
financial statements.
26In accounting for compensated absences, the form of an employer’s policy for compensated absences
should not prevail over the substance of actual practices. For example, if employees customarily are paid
―sick leave‖ benefits even though their absences from work are not actually the result of illness, those
benefits should not be considered sick leave benefits for purposes of applying paragraphs 78 and 79, but
rather should be recognized in accordance with paragraph 77.
27Accumulating means that earned but unused rights to compensated absences may be carried forward to
one or more periods after the period in which earned, even though the amount that can be carried forward
may be limited.
28Vesting rights are both vested rights and those rights that will eventually vest but have not yet vested (for
example, because the employee has not yet completed a required length of service). Vested rights are those
for which the employer has an obligation to pay even if an employee terminates; that is, they do not depend
on an employee’s continued employment.
29
[Completely Superseded]
79. Compensated absences for accumulating nonvesting rights to receive sick leave
benefits should not be accrued as earned; instead, they should be recognized as
expenditures when the leave is taken.
80. Expenditure recognition for sabbatical leave depends on the purpose of the leave. If
sabbatical leave is granted so the employee can perform research or public service or
obtain additional training to enhance the reputation of or otherwise benefit the employer,
the compensation is not attributable to services already rendered (paragraph 77a).
Accordingly, an expenditure should not be recognized in advance of the leave. If,
however, the leave is granted to provide compensated unrestricted time off for past service
and the other conditions for recognition in paragraph 77 are met, an expenditure for
sabbatical leave should be recognized when earned.
Operating Leases
81. Expenditures result from operating leases. Cod. Sec. L20 provides guidance for
distinguishing between capital and operating leases. If the operating lease agreement
requires lease payments to be made on a level-payment basis, expenditures for operating
leases should be recognized as they accrue over the lease term and should be measured in
accordance with the terms of the lease agreement. If the lease agreement specifies
scheduled rent increases, the lease transaction should be accounted for as provided in
GASB Statement 13, and expenditures should be recognized using an accrual basis of
accounting.
Capital Expenditures
82. Capital expenditures result from acquiring capital assets through purchase,
construction, or capital lease. Capital expenditures should be recognized when capital
assets are acquired. Paragraphs 91 and 92 of this Statement provide guidance for
expenditures for capital assets acquired through installment purchases. Cod. Sec. L20
provides guidance for expenditures for capital assets acquired through capital leases.
Codification Section 1400, ―Fixed Assets,‖ provides guidance for reporting general fixed
assets.
Other Financing Uses
83. Claims incurred against financial resources from refunding general long-term capital
debt and operating transfers-out should be reported as other financing uses. Issuance
30
[Completely Superseded]
discounts on general long-term capital debt also should be reported as other financing
uses. Recognition criteria for general long-term capital debt refundings are provided in
paragraph 93. Cod. Secs. 1600.126 and 1800.106 and .107 provide guidance on reporting
operating transfers. Recognition criteria for issuance discounts on general long-term
capital debt are provided in paragraph 89.
Residual Equity Transfers-Out
84. Claims incurred against financial resources from residual equity transfers-out should
be reported as deductions from beginning fund balance, as required in Cod. Sec. 1800.106
and .107.
Debt
85. Debt that provides financial resources to, and that is expected to be repaid from the
financial resources of, governmental funds is either capital debt or operating debt. This
Statement provides guidance for recognizing, measuring, and reporting in the operating
statement the issuance of both capital and operating debt and the repayment of operating
debt. It also provides guidance for balance sheet reporting of capital debt. Subsequent
Statements will provide guidance for balance sheet reporting of operating debt and for
recognizing, measuring, and reporting in the operating statement the repayment of capital
debt.
General Long-Term Capital Debt29
Definition
86. General long-term capital debt is those liabilities that are expected to be paid from
the financial resources of governmental funds and that provide long-term financing (a) to
acquire capital assets, including infrastructure, or (b) for certain nonrecurring projects or
29As explained in paragraph 230 of the Basis for Conclusions, certain reporting alternatives being
considered in the Board’s capital reporting project could supersede this Statement’s requirements for
reporting the issuance of general long-term capital debt, the treatment of the debt’s issuance discount and
premium, and other capital-related activity. (Alternatives being considered are discussed in the GASB’s
Discussion Memorandum, Capital Reporting, March 1, 1989.) The capital reporting standards will be
available for simultaneous implementation with this Statement.
31
[Completely Superseded]
activities that have long-term economic benefit.30 Capital debt includes debt issued by an
entity for its own capital purposes as well as to provide resources for capital grants to
other governments. General long-term capital debt generally is issued for more than one
year. However, it also includes short-term (one year or less at issuance) debt issues, such
as bond anticipation notes (BANs), provided that (a) some or all of that debt is expected to
be replaced by other debt (such as bonds or other BANs) and (b) taken together, the debt
issues are expected to be outstanding for more than one year. General long-term capital
debt initially should be reported as a liability in the GLTDAG.
87. General long-term capital debt does not need to be issued before the capital assets
are acquired; it may also include ―retroactive‖ borrowings to finance capital assets that
originally were paid for from existing funds. However, subsequently issued debt should
be reported as general long-term capital debt only if the entity intended to use long-term
financing for those assets when they were acquired.31 Unless that intent can be
demonstrated, ―retroactive‖ borrowings to finance capital assets previously acquired with
existing funds should be reported as general long-term capital debt only if the debt is
issued within one year after the capital asset acquisition. Amounts transferred from one
fund to another for capital asset acquisition in anticipation of long-term financing should
be reported as an interfund borrowing (for example, an interfund receivable in the general
fund and an interfund payable in the capital projects fund), not as an interfund transfer.
88. General long-term capital debt also includes liabilities resulting from long-term
vendor financing of capital asset acquisitions, such as capital leases and installment
purchases. For example, the liability for a capital lease that is expected to be paid from
the financial resources of a governmental fund should be reported as general long-term
30The Board currently is researching the types of nonrecurring projects and activities that have long-term
economic benefit and for which debt should be treated as general long-term capital debt. An example of the
type of project or activity being considered by the Board is toxic waste cleanup. The Board will issue
guidance on the types of projects and activities that should be treated in this manner before the effective date
of this Statement.
31To demonstrate previous intent to acquire capital assets through long-term financing, the government must
show public recognition of that intent, for example, a bond referendum to obtain voter approval for the
financing that precedes legislative approval for the capital project, or a published capital financing plan that
shows long-term debt as the expected financing source for the acquisition. Professional judgment should be
used when evaluating whether capital assets were acquired with the intent to use long-term financing.
32
[Completely Superseded]
capital debt.32 Vendor financing of capital asset acquisitions payable one year or less after
incurred (for example, accounts payable) should be reported as governmental fund
liabilities.
Debt Issuance
89. When general long-term capital debt is issued, an other financing source equal to the
face amount of the debt should be reported in the governmental fund receiving the cash
(normally a capital projects fund) in a caption such as ―Bonds issued‖ or ―Long-term notes
issued.‖ Any issue costs paid out of debt proceeds, such as underwriter fees, should be
reported as expenditures. The remaining difference between the face amount of the debt
and the cash received from the sale of the debt should be reported in the operating
statement as an issuance premium or discount, classified as an other financing source or
use. Out-of-pocket issue costs, such as attorney and rating agency fees or bond insurance,
should be reported as expenditures when the related liability is incurred.
90. The face amount of general long-term capital debt should be reported in the
GLTDAG. Balancing accounts should show the amount available in debt service funds
for debt principal payment and the amount that must be provided in future periods.
Long-Term Vendor Financing
91. Long-term vendor financing of capital asset acquisitions includes capital leases and
installment purchases. Recognition and measurement criteria for reporting capital leases
are provided in Cod. Sec. L20.
92. An installment purchase of a capital asset should be reported as a capital expenditure
and other financing source when the asset is acquired. If the capital asset is acquired in an
arm’s-length, exchange transaction,33 there is a general presumption that the note’s stated
interest rate is fair and adequate unless (a) no interest rate is stated, (b) the stated rate is
32However, if duplicate sources of financing are obtained to fund the same capital asset, only one of the
sources should be reported as an inflow of financial resources in the operating statement and as a liability in
the GLTDAG; the other should be reported as operating debt. For example, if a government issues bonds to
provide resources to pay for a capital asset but then acquires that asset through long-term vendor financing,
either the vendor financing or the bonds should be reported as operating debt, that is, not as an other
financing source in the operating statement and a GLTDAG liability. If, however, the duplicate financing is
used to acquire another capital asset, then the debt should be reported as an inflow of financial resources in
the operating statement and as a liability in the GLTDAG.
33See footnote 21.
33
[Completely Superseded]
unreasonable,34 or (c) the face amount of the note differs materially from the cash sales
price of the capital asset or the market value of the note. If (a), (b), or (c) exists, the entity
should report the capital expenditure at an amount equal to the fair value of the asset or the
market value of the note, whichever is more clearly determinable.35 An other financing
source equal to the face amount of the note should be reported in the governmental fund
reporting the capital expenditure. The difference between the face amount of the note and
the amount reported as a capital expenditure should be reported in the operating statement
as an issuance premium or discount and classified as an other financing source or use.
The note should be reported in the GLTDAG in accordance with paragraph 90.
Debt Extinguishment and Defeasance, including Refunding
93. Debt may be extinguished before maturity, defeased legally or in substance, or
refunded at maturity. Codification Section D20, ―Debt Extinguishments,‖ includes
definitions and criteria for treating debt as defeased legally or in substance. If new debt is
issued to provide resources to extinguish or defease old general long-term capital debt,
including BANs, the face amount of the new debt should be reported in the operating
statement of the appropriate governmental fund as an other financing source, in a caption
such as ―Refunding bonds issued.‖ Payments to extinguish or defease debt that are made
from resources provided by the new debt should be reported as an other financing use in
the operating statement of the same fund reporting the issuance of the new debt, in a
caption such as ―Payment to refunded bond escrow agent.‖ Payments that are made from
other resources of the entity should be reported as debt service expenditures. The
GLTDAG should be adjusted for the increase or decrease in the amount of general longterm capital debt.
Operating Debt
Definition
94. Operating debt is debt that provides financial resources to and is expected to be
repaid from the financial resources of governmental funds and that is not related to the
acquisition of capital assets, including infrastructure, or the financing of certain
nonrecurring projects or activities that have long-term economic benefit. Operating debt
34See footnote 22.
35See footnote 23.
34
[Completely Superseded]
includes revenue and tax anticipation notes and other short- and long-term debt issued to
finance operations, for example, to pay claims and judgments.
Debt Issuance
95. Except for issue costs as discussed in paragraph 96, the issuance of operating debt
should not be reported as having an operating statement effect. That is, the face amount of
operating debt should not be reported as an other financing source, and the issuance
premium or discount should not be reported as an other financing source or use.
96. Any issue costs paid out of debt proceeds, such as underwriter fees, should be
reported as expenditures. Out-of-pocket issue costs, such as attorney and rating agency
fees or bond insurance, should be reported as expenditures when the related liability is
incurred.
Debt Service
97. Interest expenditures for operating debt should be recognized as the interest accrues,
based on the debt’s effective interest rate. Any issuance premium or discount should be
amortized to interest expenditure using the interest method. Payments of operating debt
principal should not be reported in the operating statement; that is, debt service
expenditures should not be reported for principal payments.
Long-Term Vendor Financing
98. For long-term operating notes issued directly in an arm’s-length, exchange
transaction,36 there is a general presumption that the note’s stated interest rate is fair and
adequate unless (a) no interest rate is stated, (b) the stated rate is unreasonable,37 or (c) the
face amount of the note differs materially from the cash sales price of the goods or
services or the market value of the note. If (a), (b), or (c) exists, the entity should report a
financial resource or an expenditure at the fair value of the goods or services or at the
market value of the note, whichever is more clearly determinable.38 The issuance and
36See footnote 21.
37See footnote 22.
38In the absence of an established exchange price for the goods or services or evidence of the market value
of the note, the present value of the note is determined by discounting all future payments using an imputed
rate of interest. The imputed interest rate used should be one that approximates the rate that an independent
borrower and lender would have negotiated in a similar transaction.
35
[Completely Superseded]
payment of the note should be reported using the guidance provided for operating debt in
paragraphs 95 through 97.
Expendable Trust Funds
99. Expendable trust funds are trust funds used to account for and report financial
resources that may be spent for designated purposes. The measurement focus for
expendable trust fund operating statements should be the flow of financial resources.
Therefore, the transactions and balances of expendable trust funds should be recognized
and measured using the criteria established by this Statement.
EFFECTIVE DATE AND TRANSITION
100. The requirements of this Statement are effective for financial statements for periods
beginning after June 15, 1994. Early application is not permitted because of the need for
simultaneous implementation with GASB pronouncements on financial reporting, capital
reporting, pension accounting, risk financing and insurance, and the types of nonrecurring
projects and activities that have long-term economic benefit and for which debt meets the
definition of general long-term capital debt. Transition requirements for this Statement
will be established by a future Statement on financial reporting.
The provisions of this Statement need
not be applied to immaterial items.
This Statement was adopted by unanimous vote of the five members of the
Governmental Accounting Standards Board:
James F. Antonio, Chairman
Martin Ives, Vice-Chairman
Philip L. Defliese
W. Gary Harmer
Elmer B. Staats
36
[Completely Superseded]
Appendix A
BASIS FOR CONCLUSIONS
CONTENTS
Paragraph
Numbers
Introduction ....................................................................................................................... 101
History of the Project ................................................................................................ 102–116
Discussion Memorandum ...................................................................................... 102–105
Original ED ............................................................................................................ 106–108
Relationship to the Financial Reporting Project ............................................................ 109
Revised ED ............................................................................................................ 110–114
Current Issuance of This Statement ....................................................................... 115–116
Measurement Focus .................................................................................................. 117–126
Relationship to Other Financial Reporting Objectives .......................................... 123–126
Accrual Basis of Accounting .................................................................................... 127–128
Financial Resources .......................................................................................................... 129
Revenues ................................................................................................................... 130–199
Taxes ...................................................................................................................... 144–150
Taxpayer-Assessed Taxes Administered or Collected by Another Government ........... 151
Sales and Income Taxes ......................................................................................... 152–164
Sales Taxes.......................................................................................................... 154–155
Income Taxes ...................................................................................................... 156–164
Property Taxes ....................................................................................................... 165–174
Other Taxes .................................................................................................................... 175
Fines ....................................................................................................................... 176–177
Licenses and Permits .............................................................................................. 178–181
Donations ............................................................................................................... 182–186
Other Nonexchange Revenues Administered or Collected by
Another Government ................................................................................................... 187
Charges for Services .............................................................................................. 188–189
Investment Gains, Losses, and Income .................................................................. 190–198
Operating Leases ............................................................................................................ 199
Other Financing Sources—Capital Leases and Sales of Capital Assets ................... 200–203
Operating Expenditures ............................................................................................ 204–223
Prepaid Items.......................................................................................................... 207–208
Supplies Inventories ............................................................................................... 209–212
Compensated Absences ......................................................................................... 213–222
Operating Leases ............................................................................................................ 223
37
[Completely Superseded]
Paragraph
Numbers
Capital Expenditures ................................................................................................. 224–226
Installment Purchases ..................................................................................................... 225
Capital Leases ................................................................................................................ 226
Debt ........................................................................................................................... 227–245
Definition of General Long-Term Capital Debt..................................................... 231–237
Debt Issuance ......................................................................................................... 238–239
Debt Service ........................................................................................................... 240–243
Extinguishments and Defeasances ......................................................................... 244–245
Interfund Transfers ............................................................................................................ 246
Expendable Trust Funds ................................................................................................... 247
Agency Funds.................................................................................................................... 248
Effective Date and Transition ................................................................................... 249–253
Codification............................................................................................................... 254–255
Materiality ................................................................................................................. 256–259
38
[Completely Superseded]
Appendix A
BASIS FOR CONCLUSIONS
Introduction
101. This appendix discusses factors considered significant by Board members in
reaching the conclusions in this Statement. It includes discussion of the alternatives
considered and the Board’s reasons for accepting some and rejecting others. Individual
Board members gave greater weight to some factors than to others.
History of the Project
Discussion Memorandum
102. A Discussion Memorandum (DM), Measurement Focus and Basis of Accounting-Governmental Funds, was issued by the Board on February 15, 1985. The Board received
102 comment letters in response to the DM. Four public hearings on the DM were held in
May 1985; thirty testifiers provided input to the Board.
103. The DM discussed the basic features, advantages, and disadvantages of five
measurement focus and basis of accounting alternatives. These were flow of economic
resources—accrual basis; flow of total financial resources—accrual basis; flow of current
financial resources—modified accrual basis (1 year); flow of current financial resources—
modified accrual basis (60 days); and flow of current financial resources—cash basis. The
DM also discussed and asked for comments on specific revenue and expenditure
recognition criteria.
104. Approximately 30 percent of the DM respondents supported a flow of economic
resources alternative, approximately 30 percent preferred a total financial resources
alternative, and approximately 38 percent supported a flow of current financial resources
alternative. Nearly 80 percent of the respondents to the DM favored increased use of an
accrual basis of accounting for governmental funds.
105. After discussing the issues raised in and comments received on the DM, the Board
tentatively concluded that governmental funds should use a flow of total financial
resources (now referred to as flow of financial resources) measurement focus with an
accrual basis of accounting. Before issuing an Exposure Draft (ED), the Board solicited
39
[Completely Superseded]
further input on its tentative conclusions; it conducted a field test of the effect of those
conclusions on the financial position and results of operations of the governmental funds
of twenty-seven state and local governmental entities, and held workshops on the project
in conjunction with meetings of its national constituent organizations.
Original ED
106. On December 15, 1987, the Board issued an ED, Measurement Focus and Basis of
Accounting--Governmental Funds. The GASB received 192 responses to that ED.
During the spring of 1988, the Board heard forty-four presentations on the ED at five
public hearings and held meetings about it with various constituent organizations.
107. The 1987 ED proposed that governmental funds use a flow of financial resources
measurement focus for both the operating statement and the balance sheet. About 95
percent of the respondents that took a position on the measurement focus concept wanted
or would accept some measure of financial resource flows. However, only 45 percent
supported the measurement focus substantially as proposed. About 35 percent were
opposed to using an accrual basis of accounting, especially because of the proposed
potential effect on fund balance. Another 15 percent supported the use of an accrual basis
of accounting on the operating statement but also wanted to retain the ―traditional‖
meaning of fund balance. The remaining 5 percent supported the flow of economic
resources measurement focus, essentially full commercial accounting with depreciation of
capital assets.
108. The Board considered those responses and concluded that the best approach for
considering whether operating statement accruals should have an effect on fund balance is
through financial reporting display. That is, once the transactions have been reported in
the governmental fund operating statements, the liabilities could be reported so that they
do not affect the determination of amounts ―available‖ for appropriation. The Board
considered different ways of making this approach work, noting, in effect, that it
potentially involves reconciling between an accrual-basis operating statement and a
―modified accrual‖ measurement of fund balance. This reconciliation could be achieved
in one of several ways, for example, by using a separate statement of changes in fund
balance. This approach also involves making decisions about how the long-term operating
liabilities should be displayed, that is, whether they should be displayed in the fund but
separated from the current liabilities and ―traditional‖ fund balance, or whether they
should be displayed outside the fund in an account group.
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Relationship to the Financial Reporting Project
109. After discussing these issues and several illustrations with an ad hoc advisory
committee composed of state and local governmental preparers and auditors and
governmental accounting academics, the Board concluded that the issues would best be
resolved in its financial reporting project. The financial reporting project was placed on
the Board’s agenda in 1984. Completed portions of the project include GASB Concepts
Statement No. 1, Objectives of Financial Reporting. In March 1990, the Board issued an
ED, The Financial Reporting Entity, which solicits comments on defining the
governmental reporting entity, the second phase of the project. Once work on this portion
of the project is completed, the Board will begin work on determining what the
governmental financial reporting model should look like. This third phase of the financial
reporting project will consider the issues about the balance sheet effect of the new
operating statement measurement focus, including which long-term operating liabilities
should affect fund balance, how long-term operating liabilities should be displayed, and, if
all operating liabilities do not affect fund balance, how to display the reconciliation
between the accrual-basis operating statement and fund balance. In this process, the Board
will consider the concerns that the measurement and display of fund balance should be
reasonably similar to how that balance traditionally has been understood.
Revised ED
110. Because of the decision to resolve the balance sheet issues in the financial reporting
project as well as changes made in the 1987 ED’s proposals for tax revenue recognition,
the Board issued a revised ED, Measurement Focus and Basis of Accounting—
Governmental Fund Operating Statements, on August 14, 1989. The 1989 ED proposed
to establish the flow of financial resources measurement focus only for governmental fund
operating statements with simultaneous implementation with standards for the
governmental fund balance sheets as resolved in the financial reporting project.
111. The GASB received ninety-four responses to the 1989 ED, primarily from financial
statement preparers and auditors for general purpose state and local governmental entities
and their representational organizations. No public hearings were held on the ED. Of the
ED respondents that took a position on the measurement focus concept, approximately 87
percent want or would accept some measure of financial resource flows. Sixty-six percent
support the flow of financial resources measurement focus, and the other 21 percent favor
a flow of current financial resources measurement focus. The remaining 13 percent
41
[Completely Superseded]
support the flow of economic resources measurement focus. Reasons given for preferring
a particular measurement focus were essentially the same in the response to both the
original and the revised ED.
112. Respondents that support the flow of financial resources measurement focus believe
it is a logical outcome of the Board’s financial reporting objectives (especially the measure
of interperiod equity), is a more accurate measure of operating results, and is responsive to
important environmental factors, such as budgeting and fund accounting. They also
believe it appropriately distinguishes between debt that provides future benefit and debt
that does not, and that it will provide useful information to financial statement users.
113. Respondents that prefer the flow of economic resources measurement focus believe
the flow of financial resources measurement focus does not fully meet the Board’s
financial reporting objectives and does not fully report financial position and results of
operations. They also believe the flow of financial resources measurement focus places
too much emphasis on budgeting and fund accounting, which, although important
environmental factors, should not influence generally accepted accounting principles
(GAAP).
114. Respondents that prefer the flow of current financial resources measurement focus
believe the nature of government, especially its budgetary processes and the relationship
between available resources and current expenditures, requires a primary accountability
focus on the short term. They believe it is in the governmental funds that this short-term
perspective should be provided. They believe GAAP needs to be similar to budgetary
practices. They do not believe the change in measurement focus will be cost beneficial or
practical; they believe the change will confuse users of financial statements. These
respondents are especially concerned with the effect that the operating statement accruals
will have on the fund balances of governmental funds.
Current Issuance of This Statement
115. About 75 percent of the respondents to the 1989 ED addressed the Board’s decision
to defer the balance sheet issues to the financial reporting project. Of those, about 30
percent agree with the approach as logical, see benefit to advancing the measurement
focus and basis of accounting (MFBA) project, and recommend issuing the MFBA
Statement at this time. Another 40 percent, however, disagree with the Board’s issuing
MFBA as a separate Statement without making at least some progress on the financial
42
[Completely Superseded]
reporting project. They believe the Board’s approach results in piecemeal standards
setting because the potential effect of the operating statement accruals on the balance sheet
cannot be fully assessed and because issuing the MFBA Statement now will unduly inhibit
both the Board’s thinking and the due process of the other project. Further, these
respondents believe that if the MFBA Statement is issued now, it will probably require
revision before implementation. Although concerned about the effect of segmenting the
project, the other 30 percent do not disagree with the current issuance of this Statement.
116. Despite these concerns, the Board concluded that it is appropriate to issue this
Statement at this time. The Board believes its extensive due process has resulted in the
development of constituent consensus concerning the fundamental issue: the use of the
flow of financial resources measurement focus with an accrual basis of accounting.
Further, the Board believes the operating statement standards established by this Statement
are consistent with GASB Concepts Statement No. 1, Objectives of Financial Reporting
(Cod. Sec. 100). Most importantly, this Statement provides a necessary framework and
basic principles for advancing other Board projects. The Board also believes that issuing
this Statement currently will permit more time for the planning and systems changes that
will be needed to implement the flow of financial resources measurement focus as well as
to educate financial statement users of the need for and effects of the new reporting
standards.
Measurement Focus
117. Because of the extensive introductory section, which presents the rationale for the
Board’s decision to require the flow of financial resources measurement focus, detailed
discussion in the Basis for Conclusions on measurement focus would be redundant.
Therefore, only a few comments are made here.
118. As discussed in the Introduction, the Board believes the flow of financial resources
measurement focus for governmental fund operating statements is responsive to the
governmental environment and the needs of users of governmental financial reports. This
measurement focus is based on the concept of accountability and considers the
performance goals and measures of governmental-type activities, the intent and effect of
budgets and other financial controls, and the use of fund accounting to achieve and
demonstrate legal compliance and to enhance financial administration.
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[Completely Superseded]
119. Most importantly, the Board believes this measurement focus contributes
information necessary to report a measure of interperiod equity. The concept of measuring
interperiod equity, established as a financial reporting objective in Cod. Sec. 100, is well
suited to governmental financial reporting because it is based on the intent of balancedbudget laws.
120. As noted in the Introduction, the Board is aware that interperiod equity cannot be
measured completely in any individual governmental fund; however, the Board believes
measurements made in each governmental fund should contribute to measuring
interperiod equity as much as possible. To achieve this, the operations of those funds
should be measured using an accrual basis of accounting. An accrual basis of accounting
in governmental financial reporting generally requires recognizing the effects of
transactions and events on financial resources based on when they take place.
121. Display is as important as recognition and measurement in reporting results of
operations and financial position. That is, accomplishing a particular measurement focus
involves resolving issues about not only what to measure and when to recognize it, but
also how to clearly and logically communicate it to the financial statement user. Toward
that goal, the Board is beginning research on the portion of its financial reporting project
that will resolve how governmental financial statements should look, including issues
about fund structure, operating statement formats, the display of liabilities arising from
both the accrual of expenditures and the issuance of operating debt, and the measure and
display of fund balance.
122. In other projects, the Board intends to consider whether systematic and rational
budgetary funding methods designed to achieve interperiod equity might be appropriate
for expenditure recognition and measurement. In its deliberations, the Board will consider
the governmental operating environment. Governments tend not to cease operations, and
governmental ―ownership‖ is not ―traded‖ or ―purchased‖ like shares of stock in a
business enterprise. Their major revenues are taxes, and stable taxes provide a desirable
economic and social climate. In this environment, leveling certain types of expenditures
by using funding methods designed to achieve interperiod equity may be appropriate for
financial reporting purposes. However, the Board’s consideration of this approach for
expenditures associated with long-term liabilities will be limited to certain specific
situations, for example, complex transactions involving uncertainties, such as pension
benefits. The Board also wants to stress that this is an approach to be considered in setting
44
[Completely Superseded]
accounting standards after appropriate due process and should not be used in the absence
of a specific GASB pronouncement. Further, the effect this approach might have on
recognition of liabilities is unclear. Should a liability be recognized based on transactions
or events taking place, and, if so, how should that balance sheet measure articulate with
the measure of operations based on systematic and rational funding methods? Various
alternatives for this situation exist. The Board is aware that these concepts and
alternatives need to be carefully evaluated before standards based on them are adopted.
Relationship to Other Financial Reporting Objectives
123. In addition to helping meet the objective of measuring interperiod equity, the flow of
financial resources measurement focus meets or helps meet many of the other financial
reporting objectives set forth in Cod. Sec. 100.
124. For example, Cod. Sec. 100.178a states that financial reporting should assist users in
evaluating the operating results of the governmental entity for the year by providing
information about sources and uses of financial resources. The flow of financial resources
measurement focus is designed primarily to provide this information. This measurement
focus will also assist in providing information about how an entity finances its activities
(Cod. Sec. 100.178b).
125. The flow of financial resources measurement focus contributes to meeting several
other financial reporting objectives because it uses an accrual basis of accounting. These
objectives include providing information to assist users in assessing the service efforts,
costs, and accomplishments of the entity (Cod. Sec. 100.177c) and providing information
necessary to determine whether the entity’s financial position has improved or deteriorated
as a result of the year’s operations (Cod. Sec. 100.178c).
126. Because the flow of financial resources measurement focus has been developed
within the context of fund accounting, it also contributes to meeting two of the financial
reporting objectives that can be accomplished in part through the use of fund accounting
and financial reporting, that is, demonstrating compliance with finance-related legal or
contractual requirements (Cod. Sec. 100.177b) and disclosing legal or contractual
restrictions on resources and risks of potential loss of resources (Cod. Sec. 100.179c).
45
[Completely Superseded]
Accrual Basis of Accounting
127. This Statement requires the use of an accrual basis of accounting to recognize the
effects of transactions or events that affect financial resources in the period they take
place. This is a major change from previous standards because it requires recognition of
the financial effects of transactions or events even though the cash effect may not take
place until well into the future. Although these transactions and events may not result in a
current-period inflow or outflow of cash, recognition of their effect on financial resources
in the period they take place is a necessary part of accomplishing a measure of interperiod
equity. Reporting them helps users of financial statements determine whether current-year
revenues are sufficient to pay for current-year services.
128. The Board believes that using an accrual basis of accounting will also improve
comparability in governmental financial reporting. It believes two governments should
not report different operating results simply because of differences in the timing of cash
receipts and disbursements.
Financial Resources
129. This Statement’s definition of financial resources is designed primarily to include
cash and other assets that, in the normal course of operations, will become cash.
However, it also includes other assets acquired with cash that will be used in providing
services in the normal course of operations (such as supplies inventories) or that will be
used to satisfy a particular future liability as it arises (such as prepaid items). The
definition of financial resources also includes equity securities of another entity. These
assets are like other investments in that they will become cash but, unlike debt securities,
they are not claims to cash. As a result, they require separate identification in the
definition of financial resources.
Revenues
130. The Board believes that to properly measure interperiod equity, revenue should be
recognized when the underlying event takes place and the government has a claim to the
asset, regardless of when cash is received. This accrual-basis concept is similar to the one
used for recognizing operating expenditures. To apply an accrual basis of accounting in a
governmental environment, however, the Board considered the unique nature of certain
transactions, particularly tax revenues, and how reliable measurements can be made.
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[Completely Superseded]
131. Most revenues reported in governmental funds are not from exchange or ―earnings‖
transactions; they are from taxes and other nonexchange transactions or events. Taxes and
other nonexchange transactions involve a transfer of something of value between two or
more entities, but there is no direct relationship between the value received and the value
given. With taxes, for example, a government receives amounts from taxpayers and uses
them to provide a variety of services. The taxpayers do not necessarily receive value in
direct proportion to the taxes they pay, but they receive indirect value in having
governmental programs and services available in their community. Private-sector
accounting standards might refer to these transactions as nonreciprocal transfers, which
FASB Concepts Statement No. 6, Elements of Financial Statements, defines as
transactions ―in which an entity incurs a liability or transfers an asset to another entity (or
receives an asset or cancellation of a liability) without directly receiving (or giving) value
in exchange‖ (paragraph 137). This Board believes the term nonexchange more accurately
describes the indirect receiving and giving of value in the governmental environment.
132. As discussed in the Standards section of this Statement, taxes and other nonexchange
revenues can be tied to particular transactions or events or to transactions or events that
take place over time. However, the occurrence of an underlying event is just one of the
factors that need to be considered to recognize tax and other nonexchange revenues.
133. The confiscatory nature of taxation is another important factor in recognizing tax
revenue. In a sense, the underlying event (such as the earning of income by a taxpayer) is
merely the basis on which tax is calculated. In a democratic society, taxes can be
calculated on any basis approved by the citizens’ representatives. To assert its claim to
taxes, governments must demand or exact them from the taxpayers. The Board believes it
is with the government’s demand that taxpayers feel the burden of taxation and, therefore,
when, in an interperiod equity sense, they have provided resources. Establishing a specific
due date for payment constitutes the best evidence of an effective assertion of the demand
for taxes. The Board concluded that a logical accrual-basis revenue recognition theory
applicable to all taxes should consider both the underlying event and the demand. Both
must take place before revenue can be recognized.
134. Finally, to make revenue accruals, governments must be able to reliably measure the
amounts. This Statement requires tax revenue recognition for required tax payments that
are not received when due (delinquent taxes). For taxpayer-assessed taxes, this
delinquency accrual involves only those amounts that taxpayers are late in reporting or
47
[Completely Superseded]
remitting; that is, it does not include unreported or underreported taxes arising from
taxpayer noncompliance with reporting or other tax laws and that the government expects
to discover through taxpayer audit. The Board believes that the delinquency accrual can
be reliably measured because it is based primarily on taxes reported or received after the
taxes are due. This is because most taxpayer-assessed taxes based on taxable periods or
transactions during a government’s fiscal year are due during the year or shortly thereafter.
Therefore, material delinquencies are reported or remitted to the government during the
time it is preparing its annual financial statements. To the extent that the government has
a history of receiving delinquent taxes after financial statements are prepared, it should
accrue for those amounts it expects to ―trickle in.‖ The Board expects that in most cases
this will not be a significant amount because the longer a required tax payment is
delinquent, the more likely it is the taxpayer intends not to comply with the tax laws (and
thus those taxes should not be considered in the delinquency accrual).
135. To recognize revenue from nonexchange transactions other than taxation, this
Statement requires both an underlying event to take place and an enforceable legal claim
to exist. This enforceable legal claim is necessary to provide evidence that the
government has obtained a right to the asset.
136. Governmental funds sometimes report revenue arising from exchange transactions,
although this usually is not a material revenue source for these funds. Exchange
transactions involve a transfer of value between two or more entities in which each
participant both receives and gives value. In contrast to nonexchange transactions, the
relationship between the giving and receiving is direct, for example, the payment of
interest for the use of money. In these transactions, a government acts as a private-sector
business enterprise would act, exchanging value for equal value in an arm’s-length
transaction. The Board sees no reason to recognize revenue from exchange transactions
differently in governmental funds than in proprietary funds if both funds use an accrual
basis of accounting. Therefore, the requirements in this Statement for recognition of
governmental fund exchange transaction revenues are the same as those currently required
for proprietary funds. In an exchange transaction, revenue should be recognized when
earned, that is, when the entity has done what it must do to complete its side of the
transaction.
137. The Board is aware of the difficulty some entities may face in applying the revenue
recognition criteria required by this Statement when other entities administer or collect
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[Completely Superseded]
their taxpayer-assessed taxes and other nonexchange revenues. As with entities collecting
their own revenues, the Board believes that the advantages of accrual outweigh the costs
of making the measurements. The Board encourages intergovernmental cooperation in
these situations so that adequate systems can be developed to provide accrual information
in a cost-effective and timely manner. However, the Board realizes this may not always be
possible. Therefore, this Statement provides for alternative recognition of taxpayerassessed taxes and other nonexchange revenues when the revenues are administered or
collected by another government and the reporting government cannot obtain the accrual
information it needs. The Board believes that the alternative recognition criteria will
allow a cost-beneficial, objective, consistent, and verifiable measure of the reporting
government’s taxpayer-assessed taxes and other nonexchange revenues. This Statement
does not permit alternative recognition when revenues from government-assessed taxes
(such as property taxes) and from exchange transactions are administered or collected by
another government. This is because the Board does not believe the same type of
measurement problems exist for those revenues.
138. This Statement requires changes in revenue recognition by state and local
governments. The Board is aware that some believe government officials and other users
of governmental financial statements may think these newly recognized amounts are
available for spending even though they have not been collected. The Board notes,
however, that the effect of the change in tax revenue recognition—the largest single
source of governmental fund resources—often will not be significant because of the
demand criterion. Further, the Board believes the additional information provided by
revenue accrual outweighs the loss of information implicit in previous revenue recognition
criteria; in time, government officials and others will understand the change in revenue
recognition and will benefit from the additional financial information provided by that
accrual.
139. This Statement’s criteria for recognizing taxes and other nonexchange revenues
differ in several respects from the proposals in the EDs. The Board had two objectives for
those proposals. The first objective was to propose the use of an accrual basis of
accounting, and the second was to develop specific criteria for its application.
140. Some respondents to the EDs opposed the concept of revenue accrual beyond what is
―measurable and available.‖ Some opposed it because they believe accrual is not
consistent with fiscal accountability or balanced budget concepts. They believe it would
49
[Completely Superseded]
cause cash flow problems because users would think the resources are available for
spending. Others opposed or were concerned about revenue accrual because of practical
problems in its application, particularly based on the recognition criteria proposed in the
1987 ED. They cited cost-benefit concerns, a lack of adequate systems, and problems in
gathering data.
141. Many respondents to the EDs supported the concept of revenue accrual. However,
some had practical difficulties with applying an accrual basis of accounting, and others
believed that some of the proposals did not result in accrual accounting. The latter group
was especially concerned by the addition of the demand criterion in the 1989 ED,
maintaining that it severely undercut the concept of ―full accrual.‖ (This ―full accrual‖
concept would involve recognition based only on the underlying taxable event, with
measurements based on estimation.) However, the demand criterion was added after
considering the comments of a few respondents to the 1987 ED that supported accrual
accounting but thought that the nature of taxation requires such a criterion. The demand
criterion was supported by many respondents to the 1989 ED. This support came in part
from those that believed the 1987 ED proposals would result in unreliable measurements
and revenue amounts that would be more subjective and susceptible to manipulation. The
1987 ED had proposed tax revenue recognition that was closer to ―full accrual.‖
142. Some respondents to the 1987 ED were especially concerned about applying an
accrual basis of accounting to revenues administered or collected by another government.
They noted that because the reporting governments often would be unable to obtain the
accrual information from the administering and collecting governments, they would have
to report on a non-GAAP basis. The alternative revenue recognition criteria proposed in
the 1989 ED for these situations were well received by the respondents.
143. The Board has tried to balance the positions of all respondents to develop revenue
recognition criteria that are cost beneficial and practical as well as a theoretically sound
application of an accrual basis of accounting. The Board believes that both the underlying
event and the demand criteria are necessary to produce reliable accrual-basis
measurements for nonexchange confiscatory transactions.
Taxes
144. The Board believes it is particularly desirable to develop a single set of criteria
within an accrual context that can be applied to all tax revenues. In developing these
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[Completely Superseded]
criteria, the Board took into consideration the comments from the ED respondents on
proposals for income, sales, and property tax recognition and measurement. This
Statement requires tax revenue to be recognized if (a) the underlying transaction or event
has taken place and (b) the government has demanded the taxes from the taxpayer by
establishing a due date. These two conditions (taken together) are evidence that the
government has obtained financial resources, regardless of when cash is received.
145. This Statement requires that, for the amounts to be recognized as revenue for a
particular period, the demand (due date) for taxes be made on or before the end of the
period. However, it also requires revenue to be recognized for taxpayer-assessed taxes
that are based on underlying transactions or events taking place during the period if the
due date for those taxes is within two months after the end of the period. This is because
governments often provide ―administrative lead time‖ to allow taxpayers to calculate and
report the taxes they owe as of a particular prior date. For example, a government may
allow merchants until July 15 to close their books for the quarter ending June 30 and to
calculate and report the sales taxes owing for that period. Allowing this ―administrative
lead time‖ is necessary and appropriate, and the taxes for sales in the quarter ending June
30 should be recognized by the government as revenue for the period then ended.
Therefore, for taxpayer-assessed taxes, any due date within two months after the end of
the period should be considered to be the result of ―administrative lead time‖ and, for
purposes of revenue recognition, those taxes should be considered as ―demanded‖ or
―due‖ as of the end of the period.
146. The 1989 ED had proposed a one-month administrative lead time period. Some
respondents to the ED suggested that one month would be too restrictive in application to
certain taxes and recommended that it be extended. The Board surveyed state
governments for the collection cycles of their various taxpayer-assessed taxes and found
that taxes for taxable periods that end or transactions that take place during a state’s fiscal
year usually are due within one month thereafter. However, it found some exceptions for
sales and excise taxes as well as for some estimated and final settlement payments on
corporate income taxes. The Board agreed to extend the administrative lead time to two
months to permit more accrual without compromising the concept of demand. Also, one
respondent to the 1989 ED discussed a situation of a tax relating to the current period that
normally is due the last day of the administrative lead time. But, because that date falls on
a weekend in a particular year, is due the following day and, thus, after the administrative
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[Completely Superseded]
lead time period. The Board does not intend delayed recognition if the tax normally is due
during the two months following the government’s fiscal year-end.
147. The 1989 ED had proposed a third criterion for tax revenue recognition-acknowledgment or affirmation of the demand before financial statements are issued.
Acknowledgment was defined as taxpayer reporting or payment of the taxes. Affirmation
was defined as government billing for the taxes. The acknowledgment and affirmation
criterion was proposed to make the transactions measurable. Some respondents opposed
the criterion, saying it was impractical, inappropriate in an accrual basis of accounting,
arbitrary, and variable (given that different jurisdictions could use different lengths of time
for cut-off for acknowledgment and affirmation). These respondents suggested the use of
historical estimates to measure delinquent taxes. Because the Board’s concern about
reliable measurements pertains to amounts to be discovered through taxpayer audits and to
future final settlements, not to delinquent taxes, it agreed to eliminate the proposed
acknowledgment and affirmation criterion. As discussed in paragraph 134, the Board
believes that the additional accrual of delinquent taxpayer-assessed taxes based on
historical estimates will not be significant and can be reliably made.
148. This Statement does not allow accrual of taxpayer-assessed taxes that are unreported
because of taxpayer noncompliance with reporting or other tax laws, even though there
has been an underlying event. These are taxes that the government may discover through
audit of the taxpayer. The Board believes that, for GAAP financial reporting purposes,
any attempt to measure the amounts would be highly unreliable, subjective, and subject to
manipulation. Instead, this Statement requires recognition of revenue in the current period
for taxes discovered through audit if they are assessed against the taxpayer before financial
statements are issued.
149. This Statement also does not allow accrual of taxpayer-assessed taxes that are due to
be paid more than two months after the government’s fiscal year-end, even though there
has been an underlying event during the fiscal year. This involves, for example, final
settlements on income taxes for a taxable period that is partially or totally within a
government’s fiscal year and that are due more than two months after the government’s
fiscal year-end. These are taxes for which the government has not made a current
demand. Because the tax revenue recognition criteria consider the confiscatory nature of
taxation, a government should not report revenue if it has not demanded payment.
Instead, the taxes should be revenue in the period of the demand.
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[Completely Superseded]
150. One respondent to the 1987 ED asked whether the proposed sales and income tax
revenue recognition criteria were intended to apply to shared revenues that are funded by
those taxes. They are not. Revenue recognition requirements for shared revenues will be
established in the Board’s project on intergovernmental transfers and nonexchange
program expenditures.
Taxpayer-Assessed Taxes Administered or Collected by Another Government
151. This Statement allows alternative revenue recognition for taxpayer-assessed taxes
administered or collected by another government if the taxing government cannot obtain
the information it needs to apply the accrual recognition criteria. The alternative allows
the taxing government to get as close as possible to the accrual if the amounts are
measurable and verifiable. The alternative starts with a minimum accrual of cash received
within one month after the end of the period because the systems run by most governments
to collect and distribute taxes of other governments include at least a one-month lag
between receipt of the taxes from the taxpayers and distribution of the amounts to the
taxing governments. Therefore, the Board believes that tax amounts distributed to the
taxing government in the month following the end of its reporting period pertain to
underlying events that took place and for which amounts were demanded on or before the
end of the period.
Sales and Income Taxes
152. In this Statement, sales and income tax revenue includes amounts that are received
when due as well as those that are delinquent. The Board believes this approach is
consistent with accrual-basis tax revenue recognition because it recognizes the effects of
the tax in the period the taxable events take place provided the demand for taxes is made,
regardless of when the amounts are collected. These criteria differ from cash-basis
recognition in that recognition is not delayed if cash is not received.
153. The major difference between the sales and income tax revenue recognition
approach in the 1989 ED and the approach in this Statement is in the measurability and tax
refund areas. The 1989 ED proposed to resolve the measurability issue by using an
acknowledgment and affirmation criterion; it also required that a provision be made for all
tax refunds regardless of their cause. A relatively large number of respondents expressed
concern that this approach was overly conservative and somewhat inconsistent. After
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considering those comments, the Board developed the approach discussed in the following
paragraphs. The Board believes the following approach also addresses the measurability
concerns raised by respondents to the 1987 ED.
Sales Taxes
154. The Board believes this Statement’s sales tax revenue recognition criteria will
produce accrual-basis results that are objective and reliable. The combined underlying
event and demand criteria will result in revenue recognition similar to what would be
recognized using only one of those criteria. This is because governments typically
demand payment of actual sales tax liabilities shortly after the sales take place. At the
same time, the measurement is objective and reliable because it is based on subsequent
receipts and reports supplemented by history-based estimates of other delinquent taxes
that will ―trickle in‖ after financial statements are prepared.
155. Given the nature of sales tax administration, the Board does not believe that
significant sales tax refund liabilities exist. If they do, however, this Statement requires
revenue to be reduced and a liability to be reported for them. If a government needs to
measure sales tax refunds, the guidance in the income tax standards for the current final
settlement refund liabilities should be applied to measure and report sales tax refund
liabilities consisting of (a) refund claims paid plus (b) refund claims made but unpaid plus
(c) refund claims unmade that are expected to ―trickle in‖ after financial statements are
prepared.
Income Taxes
156. The Board believes this Statement’s income tax revenue recognition criteria will
produce results that are objective and reliable. The Board is also aware that this Statement
will produce an income tax revenue amount that is different from the amount that would
be recognized if recognition were based on taxpayer earnings only. This is because
governments do not demand payment of actual income tax liabilities shortly after taxable
income is earned. The Board does not believe it is appropriate for governments to report
revenue based on estimates of what taxpayers may have earned. Rather, governments
should recognize tax revenue based on the tax it calls on its citizens to pay, provided the
taxpayers also have earned the income.
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157. In developing income tax revenue recognition criteria, the Board observed the
manner in which governments administer individual income taxes. Most governments
that have income taxes are states, and most states have a June 30 fiscal year-end. Most
individual income taxpayers calculate their annual tax liabilities based on a calendar year.
Individuals make progress payments on their annual tax liabilities through withholdings
and estimated payments and make a final settlement of their annual liability. That liability
generally is due to be paid on or before April 15 of the year following the calendar tax
year. The taxpayer receives a refund if the final settlement report shows that progress
payments exceeded the actual tax liability for the calendar year. On the other hand, the
taxpayer is responsible for an additional payment if progress payments fail to satisfy that
liability.
158. Progress payments on the taxpayers’ annual tax liabilities are paid in part through
employer withholding on employee wages. Withholdings are usually payable from
employers to the government based on months or quarters of wages. Employers are often
required to remit those withholdings during the month following the wage period.
Governments know which employers regularly submit withholdings from employee wages
and are able to identify employers that are delinquent in remitting withholding payments.
However, at the time of delinquency, the actual delinquent amount is not known.
Subsequent receipts and reports would indicate the amount of the delinquency, if any.
This Statement requires the accrual for income taxes from withholdings to be calculated
based on those subsequent receipts and reports, supplemented by a history-based estimate
of other delinquent withholdings that are expected to ―trickle in‖ after financial statements
are prepared. The Board does not expect that the amount of withholdings delinquent for
more than a few months would be significant.
159. Sometimes, taxpayers also make estimated payments because wage withholding is
inadequate to satisfy their annual tax liability, for example, because they have significant
amounts of income from sources that do not withhold taxes. Taxpayers are required to
make estimated payments of individual income taxes based on calendar quarters, and
those amounts usually are due to be paid during the quarter or immediately thereafter.
However, based on individual circumstances, taxpayers may not be required to submit an
estimated payment for each calendar quarter. Therefore, taxpayers that are ―delinquent‖ in
submitting estimated payments are not identifiable. However, the Board does not believe
that taxpayers submit quarterly payments more than a few months after they are due.
Instead, the Board believes that taxpayers that fail to make timely estimated payments
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would simply adjust the amount of the next quarterly payment. Therefore, the Board
believes that an accrual of delinquent income tax revenue from estimated payments
generally should be based on delinquent estimated payments received up until the next
quarterly payment date.
160. The final due date for final settlements of calendar-year individual income tax
liabilities generally is April 15. Therefore, for fiscal-year governments with calendar-year
taxpayers, final settlement reports for the calendar tax year that ends during the
government’s fiscal year are due during the government’s fiscal year or within two months
thereafter. This Statement requires these current final settlements to be accounted for like
the other income tax payments: The effect on revenue should be calculated based on the
additional payments and refunds that are subsequently received, paid, or reported,
supplemented by a history-based estimate of other delinquent settlement reports that will
―trickle in‖ after financial statements are prepared. For the government with a June 30
year-end that uses actual information received through September 30 as the basis for its
accrual, there would be five and one-half months after the final settlement date to obtain
actual information on delinquencies. The Board does not expect that the amount of
current final settlements that continue to be delinquent when financial statements are
prepared would be significant.
161. For the June 30 government, calendar-year taxpayers are halfway through another
tax year. These taxpayers have been making progress payments on their tax liabilities as
required by the government’s withholding and estimated payment requirements. On the
April 15 following the government’s year-end, nine and one-half months hence, these
taxpayers will make a final settlement of that calendar year’s annual tax liability. This
Statement does not permit recognition in the current period for these future final
settlements. This is partly because these future final settlements are affected by events that
take place after the government’s fiscal year-end, for example, taxable income earned and
progress payments made by the taxpayer after July 1. Further, because of the potential
effect of future events and the long period of time until that next settlement, the Board
does not believe that the amount of the future final settlement is reliably measurable.
Also, amounts that will be received in future final settlements should not be recognized as
having an effect on revenue as of the government’s June 30 fiscal year-end because the
payments have not yet been demanded. Such amounts may be received in final settlement,
for example, because a government permits a taxpayer to satisfy only 90 percent of his or
her annual tax liability through withholdings and estimated payments and not be
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[Completely Superseded]
penalized. Therefore, this Statement does not permit the effect of future final settlements
of income taxes to be recognized in the current period.
162. The 1989 ED had proposed to reduce revenue for the effect of future final settlement
refund liabilities based on the history of refunds in past periods. However, that proposal
did not permit revenue recognition for the additional payments for the same final
settlement. The Board considered this treatment to be necessary because of the interaction
of the underlying event and demand criteria. Many respondents to the ED questioned this
treatment as inconsistent. The Board agrees, and this Statement requires all of the effects
of future final settlements, refunds and additional payments alike, to be treated as futureperiod transactions. The Board is aware that some may disagree with not reporting a
liability for refunds that will be paid in the future. This disagreement may be based on the
fact that the future refunds relate, in part, to the calendar tax year that is in progress and
for which progress payments have been received through withholding and estimated
payments. However, as with the additional payments in future final settlement, the Board
believes that the refunds are affected by future events and are not reliably measurable.
163. The Board discussed at length the issue of future final settlements of income taxes.
It observed that amounts are refunded for various reasons. Sometimes, taxpayer actions or
inactions provoke refunds. Some taxpayers claim too few tax withholding exemptions as
an ―enforced‖ savings plan. Others claim the same number of exemptions for state
purposes that they do for federal income tax purposes, even though the tax structures
differ. Sometimes, government actions provoke refunds. Some tax withholding tables
may have a small ―refund bias‖ because governments would rather pay small refunds than
attempt to collect small amounts due and because taxpayers prefer to receive refunds
rather than to pay more taxes at final settlement. The ―bracketing‖ of tax withholding
tables can also provoke refunds. For example, if taxable income would result in a tax
liability of between $31 and $35, the withholding table would cause a withholding of $35
for anyone in that range. Refunds may also happen because the government has structured
a significant overdemand in its withholding and estimated payment requirements. This
may be done, for example, to borrow short-term funds ―interest free.‖
164. The Board believes that governments should reduce income tax revenue and report
liabilities to the extent that government actions cause taxpayers to remit amounts that
exceed their actual tax liabilities. The Board believes that governments should be able to
reliably measure the effect their actions have in creating refunds. (The Board believes that
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a government’s history of paying refunds may indicate that its withholding and estimated
payments systems include a structural overdemand.) The Board further believes that it
would be inappropriate for a government to report that it has obtained tax revenue when,
instead, it has borrowed short-term funds interest free from its citizens. The Board does
not believe, however, that governments should report additional revenue for a similarly
structured underdemand for progress payments on income taxes. This is because of the
demand criterion—governments should not report that they have obtained revenue from
taxation if they have not demanded the amounts by establishing a current due date for their
payment.
Property Taxes
165. The Board’s decision to include a demand criterion as part of its overall concept of
tax revenue accrual necessarily affects property tax revenue recognition. The Board
believes that the property tax revenue recognition required by this Statement is consistent
with accrual-basis recognition because it recognizes the effects of the tax in the budgetary
period for which it is levied, provided the demand for taxes is made, regardless of when
the amounts are collected. Previous property tax revenue recognition criteria required
revenue to be recognized in the period for which the taxes were levied, provided they were
due during the period and collected within sixty days thereafter. Therefore, this Statement
changes revenue recognition by adding an accrual for all delinquent property taxes that are
expected to be collected.
166. The property tax proposal in the 1987 ED did not include the demand criterion.
Many respondents disagreed with that proposal and wanted to add an availability, duedate, or demand criterion. The 1989 ED proposal, which included the demand criterion,
received a more favorable response.
167. The Board believes that, unlike sales or income taxes, the event underlying claims to
property taxes is not an economic event. Instead, it believes property taxes are usually the
direct result of the budgetary process. In many cases, a government determines its
spending requirements, estimates the revenue expected from other than property taxes, and
then, to balance its budget, sets a property tax levy to provide funding not covered by other
revenues. As a result, developing a budget is a necessary first step in determining the total
property tax revenue required before property taxes can be levied and collected. In other
cases, there are statutory limitations on a property tax levy, and the government’s levy is at
the maximum. In these cases, the government does not use the budgetary process to
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[Completely Superseded]
determine the amount of the levy but, nevertheless, uses the amount of taxes that will be
generated by that maximum levy as a revenue source in its budget for a particular period.
Therefore, although not the result of a budgetary process, the levy can be specifically
identified with a particular budget and, thus, a budgetary (fiscal) period.
168. Also, the relationship of property taxes to the budget is different from the
relationship of sales, income, or other taxes to the budget. Although these other taxes
exist because of a government’s need to obtain resources, they are not directly controlled
or established by each period’s budget. Instead, their eventual receipt at certain amounts
normally is controlled by law, such as constitution, statute, or ordinance, and those taxes
would be payable at a predetermined rate even if budgets were not prepared. Also, with
income and sales taxes, it is clearer that an economic event, rather than a budgetary event,
is the event underlying the revenue.
169. In developing the criteria for property tax revenue recognition, the Board was aware
of several factors that required it to define the term property tax due date. First, property
tax due dates sometimes are not stated and, if a due date is not stated, the bills often are
due when they are issued, which may vary from year to year. Also, as often is the case, a
property tax installment normally does not have a single due date, but rather is due over a
period of time, normally a month, effectively making the day before the past-due date the
actual due date. Therefore, this Statement defines the property tax due date for purposes
of recognizing revenue and reporting receivables as the last day before penalties or interest
begin to accrue.
170. The Board believes using the demand criterion will help ensure consistent property
tax revenue recognition. Several respondents to the 1987 ED cited situations in which
changes in the budgetary (fiscal) period for which levied could result in significant
inconsistencies in revenue recognition if recognition were based only on the budgetary
period. They gave the example of May and October property tax installments being
moved from financing the budget in the period beginning July 1 to financing the budget of
the period ending the previous June 30. With the demand criterion, the May installment
could be recognized as revenue for the period ending June 30 if the budgetary period for
which levied was changed. However, the October installment could not be recognized as
revenue for the period ending June 30 unless the due date also was changed to a date
within the period ending June 30.
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171. The Board notes that, in most governmental jurisdictions, the demand (due date) for
property taxes is either within or precedes the budgetary (fiscal) period for which the taxes
are levied. As a result, for most governments, using the demand criterion produces
accrual accounting results no different from that produced if there were only a ―budgetary
(fiscal) period for which levied‖ criterion.
172. In some cases, the due date may not be during the budgetary period for which the
taxes are levied. This Statement requires property taxes received before the budgetary
period for which levied to be reported as deferred revenue and recognized in the budgetary
period for which levied. Property taxes that are due after the budgetary period for which
levied should be recognized as revenue in the period due.
173. With an accrual basis of accounting, receivables usually are recognized at the same
time as revenues. However, to provide accountability for property taxes, the Board
considered whether and in what situations property tax receivables should be reported
before revenue recognition criteria are met. The Board considered this issue because
property taxes often are measurable when levied but before revenue recognition criteria
are met. Although some ED respondents would prefer to have property tax receivables
reported when the taxes are levied, the Board has not required that reporting based on
arguments that it would needlessly inflate the balance sheet. (This effect would occur
frequently, because many entities levy property taxes in the period that precedes the
budgetary period for which levied.) Instead, the Board decided to require property tax
receivables to be reported when the property taxes are due because it believes this is the
point at which the entity has an asset, even though the amounts may be levied to fund the
budget of (and thus be recognized as revenue in) a later period. The Board believes that in
most cases property taxes are due in the period for which they are levied, so that property
tax asset and revenue recognition will coincide.
174. The requirement that property tax levy, lien, due, and past-due or delinquent dates be
disclosed is incorporated from previous governmental financial reporting standards. The
Board believes this information continues to be useful to financial statement users because
it provides information about the entity’s schedule for property tax cash flows and the
timing of the enforcement of claims against delinquent receivables.
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[Completely Superseded]
Other Taxes
175. Although this Statement provides specific recognition criteria for only sales, income,
and property taxes (the more significant revenue sources for most governments), the Board
recognizes that there are many other taxes that provide resources to state and local
governments. The Board believes the nature of many of those other taxes is similar to
those for which guidance has been provided. For example, hotel occupancy taxes, like
sales taxes, are based on particular transactions, are charged and collected by the hotel
operator at the same time hotel rental is charged and collected, and generally are required
to be reported and remitted monthly or quarterly. Therefore, hotel occupancy tax revenue
should be recognized when the rental takes place, provided the government has demanded
the taxes from the hotel operator by establishing a due date on or before the end of the
period or within two months thereafter, regardless of when the cash is received by the
entity. Similarly, if hotel occupancy taxes are administered or collected by one
government on behalf of another and the taxing government cannot obtain the information
it needs to recognize revenue in accordance with the accrual criteria, it should recognize
revenue using the recognition alternative required for sales taxes. The Board believes that
preparers and attestors, taking guidance from the general and specific recognition and
measurement criteria required by this Statement, should be able to appropriately apply
accrual-basis recognition to all of their taxes.
Fines
176. This Statement requires revenue from fines to be recognized when an enforceable
legal claim exists, and it cites several conditions that constitute an enforceable legal claim.
The Board believes this requirement is consistent with an accrual basis of accounting
because revenue recognition does not depend on the timing of the cash receipts. This
Statement also specifically requires an appropriate allowance for uncollectible fines
because of the potential for those amounts to be significant for some entities. For
example, in areas with a large transient population, a large percentage of parking tickets
may never be collected because the cost of collecting them would exceed the amount of
the fines.
177. Although the Board believes that accruing fines revenue is appropriate, it also was
persuaded by respondent comments to permit cash-basis recognition if accrual is not
practicable. Many respondents to the EDs argued against the accrual of fines revenue
because of cost–benefit considerations, inadequate systems, practical problems in
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[Completely Superseded]
gathering the data, and measurement problems. Some respondents were especially
concerned by the ―softness‖ of the net receivable after the allowance for uncollectibles.
Licenses and Permits
178. This Statement generally requires revenue from fees for licenses and permits to be
recognized when the government has an enforceable legal claim to the amounts. The
grantee of a license or permit generally has no legal right to exercise the privilege being
granted by the license or permit until the fee is paid. Therefore, for purposes of revenue
recognition, a government’s enforceable legal claim to license and permit fees arises when
the fee is paid, provided the government has no obligation to refund amounts paid. The
Board recognizes that license and permit fees often are paid before the start of the
privilege period, but believes that cash-basis recognition will satisfy the accrual-basis
recognition requirement for fees for licenses and permits.
179. The Board observed that governments require citizens to obtain licenses and permits
so that the governments can regulate the activities involved. In some cases, the fee
charged simply provides some degree of cost offset. In other cases, however, the
government charges the fee to finance expenditures associated with regulating the activity
during the same period for which the license (or permit) is being issued. In these cases,
the Board believes that a measure of interperiod equity requires revenue recognition that
matches it to the license period and thus the associated expenditures. Therefore, this
Statement permits governments to allocate fee revenue over the license period.
Conditions that indicate the need to match fee revenue with expenditures include a timing
difference between the period in which the fee is collected and the license period. The
Board notes that governments may use a special revenue fund to account for this activity;
however, entities may also allocate fees revenue reported in the general and other
governmental funds.
180. The requirements in this Statement for license and permit fees revenue recognition
are similar to but different from what was proposed in the EDs. The EDs proposed that
―nonexchange fees‖ be recognized as revenue based on the underlying event—either a
single transaction or a period of time. Transaction-based fees were proposed to be
recognized as revenue when the entity had an enforceable legal claim to unpaid amounts
or had no obligation to refund amounts paid. Period-based fees were proposed to be
recognized as revenue ratably over the period covered by the fee. However, if allocation
would not be material to total revenue, revenue could be recognized when the fee was
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[Completely Superseded]
either due or received. Therefore, in many cases, the proposals in the EDs would have
recognized revenue when fees were received.
181. Although most of the ED respondents with comments on the proposals for
recognizing fees revenue agreed with them, a few disagreed. Some disagreed with
allocating period-based fees, citing impracticality, immateriality, and cost-benefit
concerns. Other respondents disagreed with the option not to allocate period-oriented
fees; they believe that period-based fees always should be allocated. Also, respondents
were sometimes uncertain of the types of transactions to which the proposed accounting
should apply. The Board believes that both the change in approach contained in this
Statement and the clarification that the fees involved relate to licenses and permits will
alleviate many of these respondents’ concerns.
Donations
182. This Statement requires revenue from donations of financial resources to be
recognized when the entity has an enforceable legal claim to the financial resources and it
is probable they will be received. A government’s claim to a donation exists when the
assets are received, but it also may take place before the assets are received, for example,
if property is willed to a government. Even though this Statement’s guidance for
donations does not apply to pledges for future transfers of resources, the Board believes
that having basic guidance in this Statement that requires accrual-basis recognition of
donations is necessary and helpful.
183. Generally, this Statement requires that governments not report the donation of a
capital asset in the operations of the period. This is because the asset donated is not a
financial resource. However, this is not true for donations of capital assets that the entity
intends to sell immediately. This is because the current- or future-period receipt of
financial resources takes place primarily because of the donation, not the sale, and that
inflow of financial resources should be recognized as revenue in the period of the
donation. However, this Statement requires that the intent to sell the asset be
accompanied by the ability to sell it, evidenced by a subsequent sale or contract to sell.
184. Comments from ED respondents show that they generally agree with the accounting
for capital asset donations required by this Statement. However, some respondents to the
1989 ED prefer that all capital asset donations be reported in the operating statement, as
had been proposed in the 1987 ED. However, the Board was persuaded by comments on
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[Completely Superseded]
the 1987 proposal that the treatment complicates and inflates the operating statement and
is inconsistent with a measure of financial resource flows. Some other respondents to the
1989 ED said the proposal for evidence of the intent to sell donated capital assets is too
strict and wanted, instead, a criterion of ―good faith‖ intent to sell. The Board continues to
believe that, for purposes of revenue recognition, ―intent to sell‖ should be clearly
established and that the criteria in this Statement are appropriate.
185. A few respondents to the 1987 ED stated that the Board should provide guidance for
donations received with restrictions on their use. The Board notes, however, that financial
reporting about restrictions on the use of donated assets is accomplished through display
in restricted accounts and funds, not through differences in revenue recognition. Because
the intent of this Statement is to provide operating statement recognition and measurement
standards, not financial reporting display standards, this Statement includes no guidance
on the display of restricted donations.
186. One respondent to the 1989 ED questioned whether the guidance for donations was
intended to apply to ―donations‖ from other governments, that is, grants. The Board did
not intend that the donation provisions apply to grants. The recognition and measurement
of grants revenue is the subject of another Board project. Accordingly, this Statement
defines donations, for purposes of applying the standards, as voluntary contributions of
resources to a governmental entity by a nongovernmental entity.
Other Nonexchange Revenues Administered or Collected by Another Government
187. This Statement allows alternative revenue recognition for fines, fees for licenses and
permits, and other nonexchange revenues administered or collected by another
government if the reporting government cannot obtain the information it needs to apply
the accrual recognition criteria. The Board believes the alternative allows the reporting
government to get as close as possible to the accrual if the amounts are measurable and
verifiable. The alternative starts with recognition of cash received during the period
because, unlike tax systems, there is no standardized lag between receipt and distribution
of nonexchange revenues in the systems run by governments that collect fines and fees for
others.
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Charges for Services
188. User fees are charges for specific goods or services and result from exchange
transactions; that is, they are earned. (User fees differ from fees for licenses and permits.
Licenses and permits grant the fee payor the privilege of engaging in a regulated activity;
user fees are paid to purchase goods or services.) The Board believes that user fees are
charged when there is an intent to recover some or all of the expenses or expenditures
associated with providing the goods or services. Often, these activities and fees are
reported in proprietary funds, with revenue recognized as the fees are earned, thereby
matching revenues with the cost of services, and measuring net income and capital
maintenance. Sometimes, however, these activities and fees are reported in governmental
funds, and the Board believes recognition of this revenue should not differ just because it
is reported in governmental funds. Therefore, this Statement requires these revenues to be
recognized in the governmental funds when earned, regardless of when received, thereby
―matching‖ user fee revenues with associated expenditures.
189. Respondents to the EDs generally agreed with the proposed recognition of revenue
from user fees. However, respondents were sometimes uncertain of the types of
transactions to which the accounting should apply. Therefore, the Board has clarified the
provisions in this Statement by indicating that user fees are charges for specific goods or
services and by providing several examples. The Board believes the substance of the
transaction and past experience with similar transactions should enable entities to
determine whether fees are paid for a privilege or for goods or services.
Investment Gains, Losses, and Income
190. This Statement requires recognition of investment interest and dividends when
earned. Investment income is measurable when earned and recognition at that time
appropriately reports the effects of the transactions when they take place.
191. This Statement requires equity securities to be reported at cost and debt securities at
cost or amortized cost. Investment gains and losses are required to be recognized when an
investment is sold. The Board believes these requirements are consistent with current
practice. The Board considered the applicability of FASB Statement No. 12, Accounting
for Certain Marketable Securities, which generally applies to private-sector business
enterprises. This Board believes that the FASB Statement 12 requirement to value
marketable equity securities at the lower of cost or market is a practical solution for
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[Completely Superseded]
entities investing in those securities and that it was adopted to maintain comparable
valuation for portfolios in a declining market, while preserving the integrity of historical
cost in a rising market. However, the Board believes equity securities usually are not held
in governmental fund investment portfolios. Until the Board can thoroughly examine the
issues involved in the valuation of investments, it believes the cost methods used in
current practice are appropriate.
192. Many respondents to the EDs agreed with these proposals for investment valuation
and gain, loss, and income recognition. However, some disagreed with the proposed
valuation methods, preferring instead market or lower of cost or market. Others suggested
that gains and losses on investment swaps and exchanges should be deferred and
amortized instead of being recognized immediately. The Board considered the positions
of these respondents but decided to retain the requirements of this Statement until it can
thoroughly examine the issues in a future investments project.
193. This Statement requires that losses from other-than-temporary declines in the market
value of investments be reported in current-period operations, with a corresponding
reduction in the carrying amount of the investments. An other-than-temporary decline in
the market value of an investment would arise from situations affecting the issuer and the
market price of its securities, such as default or bankruptcy. This Statement also requires
that an estimated loss be recognized when the market value of an investment declines
below carrying amount and it is probable the loss will be realized in the future. An
example of this is when the entity expects to sell the investment at a loss to meet its cash
flow needs. FASB Statement No. 5, Accounting for Contingencies, requires contingent
losses to be accrued when it is probable that an asset had been impaired at the date of the
financial statements and the amount of the loss can be reasonably estimated. In both
situations described above, it is probable that an asset had been impaired. In the first set
of circumstances, the impairment is the result of external events; in the other, the loss
recognition is the result of the entity’s expectation that the investment will be sold while
in a temporary decline. In both circumstances, the loss contingency accrual requirements
of FASB Statement 5 are met, and this Board believes these losses should be recognized
currently with a corresponding reduction in the carrying amount of the investments. Most
respondents to the EDs who addressed the proposals for investment write-down agreed
with the requirements.
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194. This Statement provides guidance for reporting investments in mutual funds. The
proposal was added to the 1989 ED. The Board believes the requirements of this
Statement for mutual fund accounting are consistent with current practice. According to
Codification Section I50, ―Investments, including Repurchase Agreements,‖ paragraph
.128, a mutual fund is an open-end management investment company that sells its shares
of stock to investors and invests, on the shareholders’ behalf, in a diversified portfolio of
securities and continuously offers its shares for sale to the public. That paragraph also
points out that mutual funds send out periodic statements showing deposits, withdrawals,
and dividends credited to the investor’s account.
195. The Board believes a mutual fund investment is like an investment in a pool and not
like an investment in either equity or debt securities. Therefore, this Statement requires
similar valuation for investments in mutual funds and those in investment pools. Further,
the Board believes valuation of a mutual fund investment at cost or amortized cost (as
required for equity and debt securities) would not be appropriate. This Statement requires
changes in a mutual fund account from other than deposits and withdrawals to be
recognized as a net figure, even though, for purposes of reporting each investor’s account,
some funds may separately report the effect of dividends, interest, and net realized and
unrealized gains of the securities held by the fund. The Board does not believe differences
in the way mutual funds report the transactions affecting the accounts should result in
differences in reporting by governmental entities with mutual fund investments.
Respondents to the 1989 ED generally agreed with the proposal for mutual funds.
196. This Statement requires the use of other-than-cost methods for reporting certain
investments. As illustrated in paragraph 65, certain situations require some generally
accepted valuation method other than cost. For example, if a contractual relationship with
an outside entity requires market valuation, then that method is more meaningful and
should be used for financial reporting purposes.
197. In many cases, gains, losses, and income from specific investments become the
assets of funds other than the funds that report the investments. Often, this is the result of
legal or contractual provisions; for example, some state laws require that, unless
specifically provided for elsewhere in state law, all amounts earned by all investing
activities of the state treasurer should accrue as revenue to the general fund. This
Statement generally requires that if the situation takes place because of a legal or
contractual provision, the gains, losses, and income should be recognized in the recipient
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[Completely Superseded]
fund; otherwise, the gains, losses, and income should be recognized in the fund reporting
the investment, with a transfer reported to the recipient fund. However, this Statement
requires that if gains, losses, and income from specific investments become the assets of a
fund other than the fund that reports the investments because of legal or contractual
provisions requiring a transfer of the resources (for example, from a nonexpendable to an
expendable trust fund), a transfer should be reported.
198. A few respondents to the EDs agreed with the proposal, but slightly more disagreed,
with most of them preferring to always recognize the gains, losses, and income in the fund
reporting the investment. They believe legal provisions should not govern reporting
requirements, that the difference proposed for reporting introduces inconsistency, and that
their alternative would better report the economic effect of the transaction and the
movement of resources across funds. The Board reviewed these arguments and disagrees.
The Board believes the alternative proposed would result in excessive reporting of
interfund activity and that reporting in accordance with legal provisions does have a place
in governmental financial reporting. Except for those legally or contractually required
transfers of resources, the Board believes the amounts should be reported in the operations
of the fund legally or contractually designated to receive them, not in the fund reporting
the investment, because the amounts were never ―available‖ to the fund reporting the
investment. However, in the absence of such legal or contractual provisions, the Board
believes any investment gains, losses, and income from specific investments are
―available‖ to the fund reporting the investments and, therefore, should be recognized in
the operations of that fund. If, for whatever reason, the amounts become assets of another
fund, a transfer should be reported in the financial statements.
Operating Leases
199. The 1989 ED proposed that operating leases of governmental funds generally be
accounted for using the lease contract terms, regardless of whether the lease terms
required scheduled rent increases or equal annual payments. This is because the Board
believes that the contract terms should be the basis for the accounting unless those terms
are not ―systematic and rational,‖ for example, if scheduled rent increases are the result of
a financing. Shortly after the 1989 ED was released, the Board began a project on
operating leases with scheduled rent increases. That project resulted in GASB Statement
13, which generally requires the use of the contract terms to account for operating leases
with scheduled rent increases, regardless of the fund type used to report the transactions.
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Many respondents to both the 1989 ED and the ED of Statement 13 generally agreed with
the operating leases proposals. Because of the issuance of Statement 13, detailed
provisions for operating leases with scheduled rent increases are not needed in this
Statement.
Other Financing Sources—Capital Leases and Sales of Capital Assets
200. This Statement requires other financing sources from the capital lease or sale of
capital assets to be recognized at the inception of the lease term or when the asset is sold,
respectively, regardless of when amounts are received because these are exchange
transactions and these are the points at which the entity earns the amounts.
201. This Statement requires the inflow of financial resources resulting from the sale or
capital lease of capital assets to be reported as an other financing source, rather than as
revenue. Generally, operating statement classification of the effect of transactions as
revenues, expenditures, and other financing sources and uses is an issue for the financial
reporting project. However, the Board believes that amounts received from the conversion
of capital assets into financial resources through sale or capital lease are not properly
reported as revenue. This is because it believes that to properly measure interperiod
equity, revenue should include only amounts related to new resources obtained in the
current period, not amounts for conversions of existing resources into another form.
202. Except for the requirements concerning the measurement of operating lease revenue
and expenditures and the reporting of other financing sources in full at the inception of a
capital lease term, this Statement refers to Cod. Sec. L20 for guidance on treatment of
leases. That section, in turn, refers to FASB Statement No. 13, Accounting for Leases, as
amended and interpreted, for classification, recognition, and measurement criteria and
provides guidance for applying those standards in governmental accounting and financial
reporting. Because of higher priorities, this Board has not fully examined whether the
requirements of FASB Statement 13, as amended and interpreted, are completely
applicable to the public sector. The Board may examine the classification, recognition,
and measurement criteria for leases at a later date.
203. This Statement provides measurement criteria for arm’s-length, exchange
transactions for long-term installment sales of capital assets. In these sales, each party is
acting in its own best interest, and the asset is being sold at fair value. Accordingly, an
other financing source is required to be reported at that value even though financing terms
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appear to indicate another sales price. These measurement criteria do not apply, however,
to capital asset sales in other than business-like, arm’s-length transactions. (For example,
acting in the public interest, a government sells surplus capital assets to another
government at a price substantially below market value or vacant land in the downtown
area to a redevelopment firm at a price below acquisition cost.) Measurement of these
types of transactions will be separately considered by the Board.
Operating Expenditures
204. The Board believes that to measure interperiod equity, operating expenditures
generally should be recognized when transactions or events that result in claims against
financial resources take place. Under previous standards, governments did not recognize
operating expenditures for those liabilities that would not be paid with currently available
financial resources. This was consistent with the previous measurement focus on sources,
uses, and balances of expendable available financial resources. However, the Board
believes that measurement focus did not permit the assessment of interperiod equity; also,
it permitted budgetary practices and the timing of cash flows to unduly influence the
financial reporting of results of operations.
205. With accrual recognition of operating expenditures, the meaning of expenditures
changes from amounts that were paid during the period or that are payable with currently
available financial resources to a financial measure of the transactions or events affecting
the operations of the current period that require the use of financial resources in either
current or future periods. The Board recognizes that users of governmental financial
reports will need to be educated about the implications of this change. Users need to
know that it is a new perspective on the same conditions that the government faced before
converting its governmental fund operating statements to the flow of financial resources
measurement focus. It is a perspective intended to improve accountability by requiring the
operating statement to show the financial consequences of transactions or events in the
period they take place.
206. Governmental fund operating expenditures arise from both exchange and
nonexchange transactions. In an exchange transaction, each party to the transaction
receives and sacrifices something of value. This Statement provides detailed recognition
criteria for operating expenditures arising from certain exchange transactions, including
the purchase of services, such as personal services, insurance, rent, and utilities. However,
many governmental fund operating expenditures arise from transactions other than
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exchanges. These are transactions in which governments transfer resources to other
governments and to citizens for legislatively approved programs, such as education,
housing, and food. The Board is separately researching the issues on accrual-basis
recognition of operating expenditures arising from nonexchange transactions.
Prepaid Items
207. This Statement requires prepaid items to be reported as financial resources and
expenditures for prepaid services to be recognized when the related services are received
(the consumption method). The Board believes this method is consistent with the flow of
financial resources measurement focus because it believes prepaid items are in essence
financial resources—cash is converted into another form that will be used to satisfy a
particular future liability as it arises. This Statement defines prepayments as payments in
advance of the receipt of goods or services in exchange transactions. The Board believes
additional issues need to be considered before standards can be established for recognition
of payments in advance in nonexchange transactions. These issues will be considered in
the Board’s research on intergovernmental revenues and expenditures and other
nonexchange operating expenditures.
208. Many respondents to both EDs commented on the proposal to recognize
prepayments as expenditures using the consumption method. Virtually all of them agreed
with the proposal.
Supplies Inventories
209. This Statement requires supplies inventories to be reported as financial resources and
expenditures when used in operations (the consumption method). The Board believes the
consumption method for supplies expenditures is necessary to measure interperiod equity
and, if governmental funds are to measure interperiod equity as much as possible, the
consumption method should be used in those funds. It believes supplies inventories are
financial resources because they are a conversion of cash (a financial resource) into
another form that will be used instead of cash in future operations. This treatment is
consistent with that for prepayments, which is also a conversion of cash into another form
of financial resources.
210. About three-quarters of the respondents to both EDs with a position agreed with
using the consumption method for supplies expenditures. The other respondents preferred
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the purchases method (recognition of expenditures when supplies are acquired) as a
requirement or an option. These respondents do not think the consumption method is cost
beneficial. They also do not believe supplies inventories are financial resources. Further,
they believe that using the consumption method for supplies expenditures but the
purchases method for capital expenditures confuses the measurement focus through
different treatment of similar items (that is, physical assets).
211. Some of those respondents that prefer the purchases method for recognizing
expenditures for supplies and prepaid items pointed out that the transactions are generally
immaterial and questioned whether the Board intends the consumption method to be
applied to immaterial items. As stated at the end of the Standards section, the provisions
of this Statement need not be applied to immaterial items. The requirement to use the
consumption method is not intended to imply a lower level of materiality for these
particular transactions. If the effect of using a method other than the consumption method
is not materially different from using the consumption method, the other method may be
used.
212. A few ED respondents suggested that the Board establish valuation and flow
assumptions for supplies inventories. The Board considered this issue, but decided that
existing GAAP should apply and guidance in this Statement is not necessary.
Compensated Absences
213. This Statement requires expenditure recognition for certain compensated absences
when the benefits are earned by employees. This recognition is required for vesting sick
leave that will be paid as a termination benefit and for accumulating or vesting
compensated absences for other than sick leave. Previous standards required recognition
of compensated absences expenditures only for the amount of the liability that normally
would be liquidated with expendable available financial resources.
214. Many respondents to the 1987 ED disagreed with the compensated absences
proposal because it required reporting the liability in the fund, thus reducing fund balance.
Even though the issue of displaying this liability was removed from the 1989 ED,
respondents continued to be concerned about the eventual effect of the accrual on the fund
balances of governmental funds. These respondents believe that reporting compensated
absences as a fund liability would significantly reduce fund balance, sometimes to a
deficit. Some also expressed the view that governments are a going concern, and thus the
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compensated absences liability is perpetual. Therefore, these respondents believe the
liability should not affect the fund’s financial position because, in effect, it will never be
paid. Some respondents also believe there would be practical problems in allocating the
liability to individual funds and tracking employees who transfer from one fund to
another, thus earning the benefit when their salary is paid by one fund but taking and being
paid for the benefit when their salary is paid by a different fund.
215. Before issuing the 1989 ED, the Board considered the issue of compensated
absences at length. To obtain further information about the nature of the transactions in
the public sector, the Board conducted a survey of the compensated absences benefits,
funding, and financial reporting of more than seventy state and local governments. The
results of this limited survey led the Board to believe there is a need for more research on
how to recognize and measure compensated absences expenditures using the flow of
financial resources measurement focus and an accrual basis of accounting. Specifically, it
agreed that it needed more research about whether FASB Statement No. 43, Accounting
for Compensated Absences, provides the proper criteria. Rather than delay issuing this
Statement to reexamine compensated absences recognition and measurement, the Board
decided to adopt a modified version of FASB Statement 43 (as discussed below), with the
understanding that it will reexamine the issues before this Statement becomes effective.
216. A few respondents to the 1989 ED commented on the Board’s intended
reexamination and disagreed with the approach. They believe that the final standards for
compensated absences expenditure recognition and measurement should be resolved either
entirely outside this Statement or before this Statement is issued. The Board decided
nevertheless to issue only the basic recognition standards in this Statement. The Board
wishes to make it clear that reexamination of the compensated absences expenditure
standards will be within the context of the flow of financial resources measurement focus
and An accrual basis of accounting. Further, including these standards in this Statement
advances the Board’s work on compensated absences by providing a framework for the
reexamination.
217. FASB Statement 43 permits optional recognition for accumulating nonvesting sick
leave—it can be accrued as earned or recognized as taken. This Statement differs from
FASB Statement 43 in that it does not permit accrual of nonvesting sick leave benefits as
they are earned; instead, recognition is required as the nonvesting sick leave is taken. In
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effect, the amount is recognized as part of normal salary expenditures. Respondents to the
1989 ED that commented on this proposal generally agree with it.
218. This Statement also differs from FASB Statement 43 on the recognition of vesting
sick leave. FASB Statement 43 requires recognition when the employees earn the
benefits. This Statement, on the other hand, requires recognition when the employees earn
the benefit, provided the benefit is expected to be paid as a termination benefit, for
example, as a cash payout at termination. Respondents to the 1989 ED that commented on
this proposal generally agree with it, although some believe that the language of the
proposal was somewhat unclear. Therefore, changes to the language were made to clarify
the standard.
219. The Board made these modifications to the provisions of FASB Statement 43 partly
because of the nature of sick leave benefits in government. The Board’s compensated
absences survey found that although about three-quarters of the survey respondents allow
some or all of their employees to vest some or all of their sick leave balances, no
respondent vests all employees with the full value of their total accumulated sick leave
balances. Instead, the governments limit the vested benefit by using certain techniques,
such as reducing the balance by a ―vesting rate‖ such as 50 percent, limiting vesting only
to retiring employees or employees with twenty years of service, or limiting the number of
days that will vest even though there may not be a limit on accumulation. Therefore, the
Board believes most sick leave in the public sector tends to be accumulating but
nonvesting or only partially vesting.
220. The Board also observed that most of the survey respondents were not reporting a
liability for accumulating nonvesting sick leave. Of the few respondents that were
reporting a liability, most were reporting an amount equal to the full accumulated
balances; that is, they were not reporting only the portion for which payment was
probable. Therefore, the Board believes most governments are not reporting a liability for
accumulating nonvesting sick leave and those that are often may be overstating it. The
Board also notes that the cost of determining the amount for which payment is probable
may exceed the benefit of reporting it. Accordingly, this Statement prohibits reporting an
expenditure for accumulating nonvesting sick leave when it is earned.
221. This Statement does not include standards for valuing compensated absences
liabilities. Although only a few respondents disagreed with the ED proposals for using
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current salary rates generally to value the liability and for not including a provision for
fringe benefits, the Board agreed that those provisions represented a ―fine-tuning‖ of the
compensated absences expenditures recognition standard. Therefore, the Board believes
these issues would be better handled in its reexamination of compensated absences
recognition and measurement.
222. Because of the frequency of the use of sabbatical leave in the governmental
environment, the Board decided that this Statement should provide specific recognition
criteria for those absences. Although FASB Statement 43 does not provide specific
recognition criteria for sabbatical leave, it is discussed in that Statement’s Basis for
Conclusions. The recognition criteria for sabbatical leave in this Statement encompass not
only those situations discussed in the Basis for Conclusions of FASB Statement 43, but
also leave for additional training, which often takes place in elementary and secondary
educational systems. Although a few respondents disagreed with the proposal, stating that
the reporting of the liability should not depend on the purpose for the leave, the Board
continues to believe the criteria are appropriate, especially for expenditure recognition.
Operating Leases
223. This Statement requires expenditures on operating leases that require level payments
to be recognized as they accrue over the lease term and to be measured in accordance with
the terms of the lease agreement. It also refers to the provisions of GASB Statement 13
for guidance on recognizing expenditures for operating leases with scheduled rent
increases. The reasons for these requirements are discussed in paragraph 199.
Capital Expenditures
224. In the flow of financial resources measurement focus, capital expenditures are
recognized when capital assets are acquired, regardless of when amounts are paid. The
recognition standards in this Statement are consistent with practice and previous standards
for recognizing capital expenditures.
Installment Purchases
225. This Statement provides measurement criteria for capital assets acquired by longterm installment purchase in an arm’s-length, exchange transaction. Because in these
transactions each party to the exchange is acting in its own best interest, the asset is being
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[Completely Superseded]
acquired at fair value, and the capital expenditure should be measured at that value even
though financing terms appear to indicate another purchase price.
Capital Leases
226. This Statement refers to Cod. Sec. L20 for guidance on the treatment of capital
leases. That section, in turn, refers to FASB Statement 13, as amended and interpreted,
for guidance on the classification, recognition, and measurement criteria for capital leases.
As discussed in paragraph 202, the Board may examine the classification, recognition, and
measurement criteria for leases at a later date.
Debt
227. This Statement provides guidance for reporting in the operating statement the effect
of issuing debt that provides financial resources to, and that is expected to be repaid from
the financial resources of, governmental funds. However, it provides operating statement
recognition guidance for the repayment of only operating debt and balance sheet reporting
guidance only for capital debt. As discussed below, the capital reporting project will
provide standards for the operating statement effect of the payment of capital debt and will
reexamine the operating statement reporting of the issuance of that debt. As discussed in
paragraphs 107 through 109, the display of liabilities arising from governmental fund
operating expenditures, including debt issued to fund operating expenditures or operating
deficits, will be considered by the Board in its financial reporting project.
228. This Statement distinguishes long-term debt issued to acquire capital assets or to
finance certain nonrecurring projects or activities that have long-term economic benefit
(general long-term capital debt) from debt issued to finance operations or in anticipation
of revenues (operating debt). That distinction is evidenced by the requirement to report
the general long-term capital debt as an other financing source in the operating statement,
but not to report an operating statement effect for the issuance of operating debt. The
Board believes that in an operating statement designed to help achieve a measure of
interperiod equity, it is appropriate to report an inflow of financial resources for debt
incurred to acquire capital assets or to finance certain nonrecurring projects or activities
that have long-term economic benefit; those kinds of debt are incurred for the benefit of
the entity and its constituency over current and future periods. This is especially necessary
because capital asset acquisitions and nonrecurring projects and activities are reported as
expenditures in the operating statement.
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229. The Board strongly believes that operating debt should not be reported in the
operating statement as an inflow of financial resources. This is because the Board
believes the governmental fund operating statement should report the extent to which the
entity’s operating expenditures were covered by its revenues. It does not believe
interperiod equity can be measured (or that it should be reported as having been achieved)
by reporting borrowings for operating purposes as an inflow of financial resources in an
operating statement based on financial resource flows.
230. This Statement provides guidance for the balance sheet reporting of capital debt and
requires that general long-term capital debt continue to be reported in the GLTDAG. The
Board’s capital reporting project will further consider how to recognize, measure, and
report the changes in and balances of that account group, as well as other capital-related
activity and balances. Certain reporting alternatives being considered in that project may
change this Statement’s requirement to report the issuance of capital debt in a
governmental fund operating statement. (See the GASB’s March 1, 1989 Discussion
Memorandum, Capital Reporting.) For example, one capital fund alternative discussed in
the DM would not report the issuance of capital debt as an inflow in the operating
statement. However, other alternatives being considered would. Also, different methods
of dealing with the debt’s issuance discount and premium are considered. The capital
reporting standards will be available for simultaneous implementation with this Statement
and the other related recognition, measurement, and financial reporting Statements.
Definition of General Long-Term Capital Debt
231. This Statement defines general long-term capital debt to be the long-term financing
for capital assets and certain nonrecurring projects or activities that have long-term
economic benefit that will serve the entity and its constituents over current and future
periods. The Board believes, therefore, that it is appropriate in measuring interperiod
equity to charge future periods with the effect of repaying that financing. Respondents to
the EDs generally agreed with the overall definition of general long-term capital debt.
232. The 1989 ED proposed to include within the definition of general long-term capital
debt the debt that is issued to finance certain nonrecurring projects or activities that have
long-term economic benefit that will serve the entity and its constituents over several
periods. Some respondents to the 1987 ED had expressed concern about the treatment of
long-term debt issued for certain purposes other than capital asset acquisitions, which they
believe also can be viewed as benefiting and serving a governmental entity’s constituency
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over several periods.
Examples given included hazardous waste cleanup and
redevelopment of blighted property. The Board surveyed the purposes—other than the
acquisition of long-lived, tangible assets—for which governments have issued debt that is
presently reported in the GLTDAG. About half of the fifty-nine survey respondents,
primarily states, cited GLTDAG debt issued for various purposes other than capital asset
acquisitions. These include the protection and conservation of environmental resources
(toxic waste cleanup, asbestos abatement, and so forth), economic development (financial
assistance to businesses willing to locate or expand their operations in the state or
locality), the acquisition or improvement of residential properties for qualifying citizens,
and the purchase of development rights from farmers. The Board believes certain projects
or activities that are nonrecurring and that have long-term economic benefit to the
citizenry have some of the characteristics of capital assets. Therefore, if debt is issued to
finance the project or activity, that debt should be treated like general long-term capital
debt. The Board is further researching this concept and will identify the transactions that
should be treated in this fashion and will provide guidance in a separate Statement before
the effective date of this Statement. Although some respondents to the 1989 ED disagreed
with the Board’s proposal, the Board continues to believe that its position on the issue is
sound.
233. This Statement provides for general long-term capital debt to include debt issued
after capital expenditures are incurred. The Board understands that governments may
initially finance capital expenditures with monies available (for example, in the general
fund) in anticipation of acquiring long-term financing. However, the Board does not
believe interperiod equity can be measured effectively by reporting financial resource
inflows for bonds issued for capital assets that have already been paid for and have been in
use for some time. Therefore, this Statement permits ―retroactive‖ borrowings for capital
asset acquisitions to be reported as general long-term capital debt only if one of two
conditions is met: The first condition is preacquisition intent to finance the capital assets
on a long-term basis; the second is obtaining the long-term financing within one year after
the capital asset is acquired. The Board believes that only in these situations is
―retroactive‖ borrowing clearly related to the capital asset acquisition. Further, although
the Board has left the evaluation of preacquisition intent for long-term financing to
financial statement preparers and auditors, it believes there should be public recognition of
such intent; that is, internal memorandums or informal planning does not sufficiently
evidence intent. The Board further cautions that such intent should not be considered to
include broad or general authorization for the long-term financing of unspecified capital
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assets; instead, the intent should relate to specific assets or classes of assets. Also, the
long-term financing should be obtained within a reasonable period of time after the
acquisition to reasonably relate to the capital assets. As further evidence that
preacquisition intent for long-term financing exists, the Statement also requires that the
―advance financing‖ of capital asset acquisitions from existing funds be reported as an
interfund borrowing if the monies are provided by a fund other than the one that reports
the capital expenditures.
234. This Statement requires long-term liabilities incurred to provide funding for the
capital purposes of other governmental entities (specifically, debt issued to finance capital
grants to other governments) to be considered general long-term capital debt and to be
reported in the GLTDAG. The Board believes that although the capital purposes financed
with the debt are not those of the reporting entity, the debt does support capital purposes
that will serve a portion of that entity’s constituency over many reporting periods.
Although many respondents to the EDs that took a position on this proposal agreed with it,
others thought it was inappropriate, saying it would distort a matching of the GFAAG and
the GLTDAG because the assets are not those of the reporting entity. The Board will
consider in its capital reporting project whether and how the two account groups should be
―matched.‖
235. As defined in this Statement, general long-term capital debt includes debt issued for
the long-term financing for capital purposes, even though some individual debt issues may
be short-term, such as bond anticipation notes (BANs). The Board believes that if BANs
were excluded from general long-term capital debt, recognition within the governmental
funds would be driven by the timing of cash flows, rather than by the measure of
interperiod equity. That is, the Board believes BANs issued as part of a long-term
financing plan for capital purposes should be reported as general long-term capital debt
because future periods benefit from the project financed by the debt, even though the debt
is short-term and therefore payable currently. Previous standards required BANs to be
reported as fund liabilities, primarily because they would require the use of financial
resources in the short term. Although this fact still exists, other facts make this
Statement’s treatment of the debt more appropriate. First is the measure of interperiod
equity as described above. Second, the expectation that some or all of the debt will be
replaced with other debt means that resources required for the future payment of the shortterm debt will be provided primarily from sources other than revenues.
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236. The Board believes the long-term financing to acquire a capital asset should be
reported only once in the GLTDAG; that is, not more than one long-term financing plan
can, through the use of the GLTDAG, be associated with future periods. The Board
believes the issuance of debt should be reported as an inflow in the operating statement
only if those amounts will be converted to another form of asset that will be used to
benefit future periods. However, the Board believes this situation of ―duplicate‖ financing
will seldom happen. This is because it believes that if financing for a capital asset
acquisition is ―duplicated,‖ the ―duplicate‖ financing usually will be used to acquire other
capital assets and thus should be treated as general long-term capital debt. However, the
Board believes it is important to illustrate the concept of a one-to-one relationship between
capital assets and related debt through this example and has accordingly done so in a
footnote to paragraph 88.
237. This Statement excludes from general long-term capital debt any liabilities arising
from capital asset acquisitions that are not part of a long-term financing plan. These
would include accounts payable and other short-term vendor financing with a term of one
year or less when incurred. Because of the short-term nature of the financing plan, the
intent in these situations is that the current period is acquiring capital assets for use by
future periods without also passing on the burden of financing the assets. Because of this,
short-term financing of a capital asset acquisition is similar to acquiring a capital asset
with cash, and the fact that the cash payment will take place in the next period is a matter
of the timing of cash flows, not a matter of reporting the effect of transactions on financial
resources.
Debt Issuance
238. This Statement requires the components of the proceeds of general long-term capital
debt to be presented separately in governmental fund operating statements. These
components are the face amount of the debt, the issuance discount or premium, and issue
costs paid out of the debt proceeds. Previous standards required only the net proceeds to
be reported—in other words, the amount received. The Board believes operating
statement presentation of these components will provide more complete information about
the terms of the financing. Further, the Board believes the costs of obtaining financing
should be reported as issue costs, whether paid directly by the entity or deducted from the
amount received from the issuance of the debt. The Board believes the cost of
underwriting, often the single largest cost of obtaining financing, has been obscured by
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previous requirements to report only net proceeds, thus leading to a material
understatement of financing costs.
239. Respondents to the EDs generally agreed with the separate presentation of the
components of the proceeds of general long-term capital debt. However, a few believe
issuance discounts and premiums should be deferred and amortized to the operations of
future periods to be consistent with an accrual basis of accounting. The Board intends to
further consider the recognition and measurement of debt service expenditures on general
long-term capital debt (including the effect of issuance discounts and premiums) in its
capital reporting project.
Debt Service
240. This Statement provides guidance for the recognition and measurement in the
operating statement of activities related to the payment of operating debt. However, it
does not provide similar guidance for general long-term capital debt. The EDs had
proposed debt service expenditure standards for general long-term capital debt. However,
because those standards would have been replaced by standards developed in the capital
reporting project for simultaneous implementation with this Statement, the Board sees no
need to include them in this Statement. Accordingly, they have been removed.
241. In establishing the accounting for operating debt, the Board decided to distinguish
between expenditures incurred on the issuance of debt (issue costs and debt insurance) and
expenditures to be incurred on the passage of time (interest). Future periods should not be
charged with expenditures incurred on the issuance of debt, and thus those expenditures
should not be deferred and amortized. However, future periods should be charged with
the fair value interest cost of the financing, because that cost is associated with the passage
of time and therefore with future periods. Therefore, for operating debt, this Statement
requires interest expenditures to be accrued, issuance discounts and premiums to be
deferred and amortized to operations using the interest method, and issue costs, including
debt insurance, to be reported as expenditures when the liability is incurred.
242. Many respondents to the EDs addressed these provisions, and most agreed with the
interest accrual because they believe it is consistent with an accrual basis of accounting.
For the same reasons, they also supported the deferral and amortization of issuance
discounts and premiums and the interest method measure of the interest expenditures.
Some respondents, however, disagreed with amortizing the issuance discounts and
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premiums on operating debt, noting that those amounts usually are not material. The
Board notes, however, that the general concept of materiality permits different treatment if
the difference is not material.
243. Some respondents also did not agree with recognizing expenditures for issue costs
for either operating or capital debt. Most supported the deferral and amortization of issue
costs, noting that that treatment is consistent with APB Opinion No. 21, Interest on
Receivables and Payables. The Board continues to believe, however, that the recognition
required by this Statement is the more appropriate method for governmental funds. One
respondent to the 1989 ED also questioned the treatment of debt insurance. The Board
believes that debt insurance should be treated as an issue cost, and this Statement
specifically provides for that treatment.
Extinguishments and Defeasances
244. This Statement expands previous standards for reporting advance refundings
resulting in the defeasance of debt reported in the GLTDAG to apply to all debt reported
in the GLTDAG that is extinguished before maturity, defeased legally or in substance, or
refunded at maturity. As previously decided by the Board in its Statement No. 7, Advance
Refundings Resulting in Defeasance of Debt, the financial resources obtained and used to
refund GLTDAG debt should be reported in the governmental fund operating statement,
with classification as other financing uses and debt service expenditures, depending on the
source of resources used to retire the old debt.
245. This Statement does not include guidance for extinguishments and defeasances of
operating debt. The EDs had proposed to apply the requirements of APB Opinion No. 26,
Early Extinguishment of Debt, to these transactions to report a gain or loss for the
difference between the reacquisition price and the net carrying amount of the extinguished
debt. This would have made the guidance for operating debt associated with
governmental funds the same as the present requirements for debt reported in proprietary
and similar trust funds. However, the Board agrees with those respondents that believe
the accounting gain or loss required to be recognized by Opinion 26 does not represent the
economic substance of the transaction. As a result, this Statement does not extend the
accounting requirements of Opinion 26 to operating debt. The Board has further decided
not to address the issue of extinguishments and defeasances of operating debt at this time.
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Interfund Transfers
246. This Statement continues existing standards for operating and residual equity
transfers. The Board believes, however, that there are many important issues that need to
be considered before it can establish standards on interfund transactions. These issues
include when and in what amounts these transactions should be recognized and whether
they should be reported as revenues and expenditures or as transfers. The Board has
examined these issues to some extent in its risk financing and insurance issues project and
is planning a more complete examination either as part of its financial reporting project or
in a separate project.
Expendable Trust Funds
247. Previous standards required expendable trust funds to be accounted for in essentially
the same manner as governmental funds. The Board concluded that this requirement
should continue. Generally, respondents to the EDs agreed with this proposal, but a few
questioned the current requirement to report expendable trust funds in the entity’s
financial statements. The Board will consider the reporting of expendable trust funds in
the future in an overall review of the reporting of fiduciary activities.
Agency Funds
248. This Statement does not apply to agency funds even though previous standards
required agency fund assets and liabilities to be accounted for using the same basis of
accounting as governmental funds. To change the reporting in agency funds to an accrual
basis of accounting could significantly change the reporting in agency funds without
adequate research. Therefore, current guidance for agency funds will remain effective
until changes are researched and proposed in a future project on reporting fiduciary
activities.
Effective Date and Transition
249. The requirements of this Statement are effective for fiscal years beginning after June
15, 1994, an extension of one year from the date proposed in the 1989 ED. The Board
believes this will allow adequate time to develop, expose, and issue the other recognition,
measurement, and financial reporting standards that will be necessary to completely
implement the flow of financial resources measurement focus. These standards include
those pertaining to financial reporting, capital reporting (recognition and measurement as
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well as display), pension accounting, risk financing and insurance, and the types of
nonrecurring projects and activities that have long-term economic benefit and for which
debt meets the definition of general long-term capital debt. As explained in paragraphs
215 and 216, the Board also intends to reconsider how to recognize and measure
compensated absences expenditures using the flow of financial resources measurement
focus and an accrual basis of accounting. The Board also believes the effective date will
give preparers adequate time to implement systems needed to comply with the
requirements of this Statement and other pending recognition, measurement, and financial
reporting Statements. The Board encourages those involved in governmental financial
reporting to begin planning for the eventual implementation of this Statement.
250. Although many respondents agreed with the projects proposed for simultaneous
implementation with this Statement, some respondents believe other projects, such as
intergovernmental transfers and nonexchange program expenditures and other
postemployment benefits (OPEB), should be added. Issues of recognition of grants and
other intergovernmental revenues and expenditures and nonexchange operating
expenditures were excluded from this Statement because they require further staff research
before the Board can develop recognition and measurement standards, and the Board
expects to issue a Discussion Memorandum soon. The Board also plans to begin research
on accounting for OPEB soon. The Board believes it would be desirable to have the
intergovernmental transfers and nonexchange program expenditures and OPEB standards
implemented at the same time as this Statement, and plans to proceed toward that goal.
However, it does not believe those standards are necessary to implement the new
measurement focus and does not intend to delay implementation for them.
251. Early implementation of the standards in this Statement is not permitted because
certain other standards will need to be implemented at the same time. Once again, the
Board believes that even though the guidance will be issued in several Statements, the
pieces are interrelated and should be treated as a single change in governmental financial
reporting standards. Once all the necessary Statements have been issued, the Board will
consider permitting early application.
252. This Statement is issued without transition guidance. This is because the Board will
consider the issue of transition as part of its consideration of liability and fund balance
display in the financial reporting project. Many comments were received on the proposals
in the 1987 ED for transition to the flow of financial resources measurement focus. These
comments primarily concerned whether the cumulative effect of the change should affect
84
[Completely Superseded]
governmental fund balances all at once or be phased in over time, whether comparative
statements needed to be presented or restated, and how to report the cumulative effect of
the change in the periods following the change. The Board will consider these comments
in deliberating the financial reporting project.
253. In both EDs, some respondents have asked for a ―window of opportunity‖ for
implementing this Statement. These respondents would like to choose one of three
possible fiscal periods for implementation to minimize the political sensitivity associated
with a significant change in financial reporting. The Board presently has not provided for
a ―window of opportunity‖ because it would only need to be considered if the changes in
financial reporting significantly affect fund balance. The possibility of such an effect is
unclear at this time.
Codification
254. Until this Statement, the Board has included in each of its pronouncements
Codification instructions to show how the provisions of its pronouncements supersede
portions of and blend with the Codification of Governmental Accounting and Financial
Reporting Standards. This has been done so that the Codification is considered
authoritative. However, the Board is issuing this Statement without Codification
instructions for two reasons. First, the Board needs to develop balance sheet display
standards that will be needed for governmental financial reporting. Therefore, a
codification of the provisions of this Statement would be incomplete. Second, it would
not be useful to blend this Statement’s provisions for measurement focus and the
recognition criteria for certain revenues and expenditures with existing Codification
guidance because this Statement will not be effective for several years and will not be
simultaneously effective with many of the present Codification provisions. The Board
intends to expose the codification of the provisions of this Statement in the future,
probably in its proposed Statement on financial reporting. In the meantime, this Statement
will be reproduced separately in the Codification beginning in 1990.
255. The 1987 ED had proposed to revise Codification Section 1700, ―The Budget and
Budgetary Accounting,‖ paragraph .116, to recommend that governmental fund annual
budgets be prepared on a basis of accounting consistent with that required by the
Codification for financial reporting purposes. That proposal was to replace the
recommendation currently in the Codification that governmental fund annual budgets be
prepared on the modified accrual basis of accounting. Many respondents commented, and
85
[Completely Superseded]
although some agreed, most did not. Although some respondents believe in theory that
budgeting and GAAP should be the same, many believe the flow of financial resources
measurement focus is not appropriate for budgeting, and others disagreed with the
proposal because they believe the Board has no role in recommending budgeting
standards, that the proposal was inconsistent with the ED’s philosophies, or that the
change was not supported by a discussion in the proposed standard. Because the Board is
not providing instructions for the codification of this Statement at this time, it is not
presently proposing a change to Cod. Sec. 1700.116 and has not reached a conclusion
about how the Codification should be revised. The Board does agree, however, that
establishing budgetary principles is beyond the Board’s mission.
Materiality
256. A few respondents to the 1989 ED thought this Statement should give greater
emphasis to materiality and suggested that it be discussed in the Statement. They were
particularly concerned because they think the Board is providing guidance on transactions
or accounts that will not be material to results of operations or financial position. The fact
that this Statement provides guidance for transactions that in many jurisdictions may not
have a material effect does not diminish the need for the guidance. The Board leaves the
application of materiality to the judgment of the on-site professionals.
257. The Board observes that materiality is defined in the Glossary of Terms in FASB
Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, as:
―The magnitude of an omission or misstatement of accounting information that, in the
light of surrounding circumstances, makes it probable that the judgment of a reasonable
person relying on the information would have been changed or influenced by the omission
or misstatement.‖ Paragraphs 123-132 of that Statement discuss the concept. GASB
Concepts Statement 1 refers readers to that discussion.
258. Although the Board sees no need for reconsidering the FASB definition of
materiality, it believes that the objective of accountability in governmental financial
reporting adds another perspective to materiality. Specifically, the Board believes that
accountability requires materiality to be judged not only in a quantitative manner, but also
in a qualitative manner. That is, the Board believes that accountability involves such
issues as legal and contractual compliance that may not have a ―material‖ effect on the
entity’s reported operating results and financial position but that would influence or
change the judgment of a reasonable person about how the government has conducted its
86
[Completely Superseded]
affairs during the period. It is this qualitative aspect of accountability that resulted in
some of the provisions of GASB Statement No. 3, Deposits with Financial Institutions,
Investments (including Repurchase Agreements), and Reverse Repurchase Agreements, for
example, the requirement to report significant violations of legal or contractual provisions
for deposits and investments.
259. This Statement applies to the recognition and measurement of transactions in the
operating statements of governmental funds. In that regard, application of materiality to
the guidance in this Statement would generally be based on quantitative considerations.
Nevertheless, preparers and auditors should also keep qualitative issues in mind while
dealing with the transactions for which this Statement provides guidance.
87
[Completely Superseded]
Appendix B
GLOSSARY
260. This appendix defines certain terms used in this Statement.
Account groups
Self-balancing sets of accounts used to account for and report on certain general
fixed assets and general long-term capital debt associated with or arising from the
flow of financial resources measurement focus of governmental fund operating
statements.
Accrual basis of accounting
A basis of accounting that recognizes the effects of transactions or events on the
resources of an entity when they take place, regardless of when cash is received or
paid.
Arm’s-length
Dealing with an unrelated party, with each party acting in his or her own selfinterest.
Assets
Probable future economic benefits obtained or controlled by a particular entity as a
result of past transactions or events.
Basis of accounting
The timing of recognition, that is when the effects of transactions or events should be
recognized for financial reporting purposes. For example, the effects of transactions
or events can be recognized on an accrual basis (that is, when the transactions or
events take place), or on a cash basis (that is, when cash is received or paid). Basis
of accounting is an essential part of measurement focus because a particular timing
of recognition is necessary to accomplish a particular measurement focus.
Capital assets
Long-lived, tangible assets (for example, equipment, buildings, land, and
infrastructure) obtained or controlled as a result of past transactions or events.
88
[Completely Superseded]
Debt proceeds
The difference between the face amount of debt and the issuance discount, or the
sum of the face amount and the issuance premium. Debt proceeds differ from the
cash received by the government to the extent that issue costs, such as underwriter
fees, are paid out of the debt proceeds.
Effective interest rate
The interest rate that, when used to discount debt service payments, produces a
present value equal to the debt proceeds.
Expendable trust fund
A trust fund used to account for and report on financial resources that may be spent
for designated purposes.
Expenditures
In governmental funds, decreases in financial resources from transactions other than
interfund transfers, issuance discounts on general long-term capital debt, and
refundings of general long-term capital debt.
Fiduciary funds
Those funds used to account for and report on assets held by a government in a
trustee or agency capacity for individuals, private organizations, other governments,
or other funds. These funds, known as the trust and agency fund types, include
expendable trust, nonexpendable trust, pension trust, and agency funds.
Financial resources
Cash, claims to cash (for example, debt securities of another entity and accounts and
taxes receivable), claims to goods or services (for example, prepaid items),
consumable goods (for example, supplies inventories), and equity securities of
another entity obtained or controlled as a result of past transactions or events.
89
[Completely Superseded]
Flow of financial resources measurement focus
A measure of the extent to which financial resources obtained during a period are
sufficient to cover claims incurred during that period against financial resources.
This measurement focus considers financial resources only and uses an accrual basis
of accounting.
Fund
A fiscal and accounting entity with a self-balancing set of accounts recording certain
assets, related liabilities, and residual equities or balances, and the changes in them,
which are segregated for specific activities or to meet certain legal or administrative
objectives or restrictions.
General fixed assets
Capital assets that are not assets of any fund, but of the governmental entity as a
whole. General fixed assets are associated with and arise from governmental-type
activities and most often result from the expenditure of the financial resources of
governmental funds.
General Fixed Assets Account Group (GFAAG)
A self-balancing group of accounts (account group) that reports certain general fixed
assets.
General long-term capital debt
Those liabilities that are expected to be paid from the financial resources of
governmental funds and that provide long-term financing (a) to acquired capital
assets, including infrastructure, or (b) for certain nonrecurring projects or activities
that have long-term economic benefit.
General Long-Term Debt Account Group (GLTDAG)
A self-balancing group of accounts (account group) that reports the unmatured
principal of general long-term capital debt.
Governmental funds
Those funds generally used to account for and report on governmental-type
activities. Depending on the sources of financial resources and the nature of the
90
[Completely Superseded]
activities reported, governmental funds are classified into four fund types: general,
special revenues, debt service, and capital projects.
Governmental-type activities
Those activities of a government that are carried out primarily to provide services to
citizens and that are financed primarily through taxes and intergovernmental
revenues.
Interest method
A method of calculating interest that produces periodic interest revenue or
expenditure (including amortization) that represents a level effective rate on the sum
of the face amount of a note and its unamortized premium or discount at the
beginning of the period. The difference between the amount calculated and the
stated interest on the outstanding amount of the note is the amount of the periodic
amortization.
Interperiod equity measurement
The measure of whether current-year revenues were sufficient to pay for current-year
services. A measure of interperiod equity would show whether current-year citizens
received services but shifted part of the payment burden to future-year citizens or
used up previously accumulated resources. Conversely, such a measure would show
whether current-year revenues not only were sufficient to pay for current-year
services, but also increased accumulated net resources.
Inventories
See Supplies inventories.
Measurement focus
The objective of a measurement, that is, what is being expressed in reporting an
entity’s financial performance and position. A particular measurement focus is
accomplished by considering not only which resources are measured (for example,
financial or economic resources), but also when the effects of transactions or events
involving those resources are recognized (the basis of accounting).
91
[Completely Superseded]
Operating debt
Debt that provides financial resources to and is expected to be repaid from the
financial resources of governmental funds but that is not related to the acquisition of
capital assets, including infrastructure, or the financing of certain nonrecurring
projects or activities that have long-term economic benefit.
Prepaid items
An asset account reporting payments in advance for unreceived goods or services
acquired in exchange transactions. Prepaid items are for such items as insurance and
rent.
Proprietary funds
Those funds used to account for a government’s ongoing organizations and activities
that are similar to those often found in the private sector. Proprietary funds are
classified into one of two fund types, enterprise or internal service, depending on the
primary users of the fund’s services.
Revenues
In governmental funds, increases in financial resources from transactions other than
interfund transfers, the issuance of general long-term capital debt, and the sale or
capital lease of capital assets. Governmental fund revenues usually result from
taxation and other nonexchange transactions or events.
Stated interest rate
The face or coupon interest rate; the rate at which interest payments are made or
received.
Supplies inventories
Materials and supplies obtained or controlled as a result of past transactions or
events and that are for use in operations.
92
[Completely Superseded]
Appendix C
ILLUSTRATION OF THE CALCULATION OF TAX REVENUES
261. This appendix illustrates the application of this Statement to the recognition of sales,
income, and property tax revenues. The facts assumed in these examples are illustrative
only and are not intended to modify or limit the requirements of the Statement or to
indicate the Board’s endorsement of the situations illustrated.
Illustration 1. Sales Taxes
Assumptions
State A, with a June 30 fiscal year-end, imposes a sales tax on all purchases. State
law establishes the following merchant remittance requirements:
a.
b.
c.
Large merchants (those who remit at least $2,000 a year) are required to remit the
taxes monthly, no later than twenty days after the end of the month in which the
taxable sales are made.
Small merchants (defined as those who remit less than $2,000 a year) are required to
file quarterly, no later than forty-five days after the end of the calendar quarter in
which the taxable sales are made.
Merchants who fail to pay their taxes on time face a heavy fine unless they file a
timely return and pay their taxes later with interest at 1 percent per month on the
unpaid balance.
The state has traditionally issued its annual financial report on September 30, and selects
August 31 as its cut-off date for obtaining accrual information.
Solution
The schedule below shows sales taxes and the revenues to be recognized for the
fiscal year ended June 30, 19X4. Assume that all amounts are expected to be collected.
The following schedule does not include opening balance reversals. All amounts are in
thousands.
93
[Completely Superseded]
a.
Large merchants-Timely cash receipts:
Cash receipts from July 1, 19X3 to June 30, 19X4
were $2,000.
Cash receipts in July 19X4 for June sales
taxes were $200.
Delinquencies:
Cash receipts in July (for months before June)
and in August (for June and before) were $100.
Large merchants who filed tax returns on time for
sales through June 30, 19X4 but did not pay
those taxes owed $25 in unpaid taxes.
Unpaid interest accrued on those taxes through June 30
was $5.
Historical experience shows that merchants who fail
to report their sales taxes on time for
sales through June 30, 19X4 are likely to pay
or report $15 of those taxes from September
through November. (Experience also shows that
payments or reportings of delinquencies after
November are negligible.)
The tax department’s sales tax system identified
several merchants holding sales tax
licenses who failed to report June 19X4 sales
taxes. As of August 31, 19X4, those merchants
who had not responded to delinquency notices
were sent delinquency billings based on
twice their May 19X4 sales tax remittances.
These billings totaled $100. (No accrual should be
made because it does not meet the criteria of
GASB Statement 11. Delinquency billings
calculated in this manner are not considered
to be a reliable measure of the tax revenue
or receivable.)
$2,000
200
100
25
5
15
–
$2,345
94
[Completely Superseded]
b.
Small merchants—
Timely cash receipts:
Cash receipts from July 1, 19X3 to June 30, 19X4 were
$300.
Cash receipts of taxes due August 15, 19X4
for the quarter ended June 30, 19X4 were
$15 in July and $50 in August.
Delinquencies:
Cash receipts of taxes due May 15, 19X4 for the quarter
ended March 31, 19X4 were $10 in July and $5 in August.
Historical experience shows that the delinquency rate for
small merchants is not material and the tax department
sales tax systems did not identify any material delinquent
small merchants still outstanding at August 31, 19X4.
(Additional delinquencies are not accrued
because they are not material.)
300
65
15
–
380
c.
Audit adjustments—
Between July 1 and August 31, 19X4, tax auditors
discovered $40 in unreported taxes on sales
through June 30, 19X4 and the state assessed
the merchants for those taxes.
40
40
Total revenue to be recognized before opening balance
reversals.
95
$2,765
[Completely Superseded]
Illustration 2. Individual Income Taxes
Assumptions
State B, with a June 30 fiscal year-end, imposes an individual income tax. Its tax
calendar is as follows:
a.
b.
c.
Employers must submit withheld taxes monthly, no later than the tenth day of the
month following the month in which the taxes are withheld.
Individuals must file an estimate. On April 15, June 15, September 15, and
December 31 they must pay one-quarter of the difference between the estimated total
tax and the estimated amount to be withheld from their salaries.
Individuals must file a return no later than April 15 of the year following the tax year,
and must pay the remaining tax owed.
The state has a 5 percent overwithholding factor built into the wage withholding
table. The state is required by statute to issue an annual financial report by October 31
following its fiscal year-end. To meet that requirement, the state has selected
September 30 as its cut-off date for making accruals.
Solution
The schedule below shows individual income taxes and the revenue to be
recognized for the fiscal year ended June 30, 19X4. Assume that all amounts are expected
to be collected. The following schedule does not include opening balance reversals. All
amounts are in thousands.
a.
Withholdings—
Cash receipts from July 1, 19X3 through
June 30, 19X4 were $2,000.
Cash receipts in July 19X4 for amounts due
July 10 and earlier were $200.
Cash receipts in August and September 19X4
for amounts due July 10 and earlier were $100.
Employers that filed without payment
through September 30 for the witholdings
due July 10 reported owing $25.
Historical experience shows that delinquent
employers will make an additional $30 in
payments after the September 30
cut-off date.
$2,000
200
100
25
30
$2,355
96
[Completely Superseded]
b.
Estimated payments-Cash receipts from July 1, 19X3
through June 30, 19X4 were $1,000.
Receipts through September 14, 19X4
for estimates due June 15 were $150.
Historical experience shows that if payments
for estimates due June 15 are not made by
September 14, the taxpayer pays the amount
as part of a later estimated or final
settlement payment.
1,000
150
–
1,150
c.
Current final settlements (due April 15, 19X4)–
Additional payments:
Between January 1 and June 30, 19X4,
taxpayers paid additional amounts or
reported tax liabilities of $750 for taxes for
the calendar year 19X3.
Between July 1 and September 30, 19X4,
taxpayers paid additional amounts or
reported tax liabilities of $80 for taxes for the
calendar year 19X3
Historical experience shows that $20 of additional
payments in delinquent settlements will
continue to ―trickle in‖ after September 30.
Refunds:
Between January 1 and June 30, 19X4, taxpayers
claimed refunds of $850 for taxes for the
calendar year 19X3.
Between July 1 and September 30, 19X4,
taxpayers claimed refunds of $100
for taxes for the calendar year 19X3.
Historical experience shows that $10 of refund
claims in delinquent settlements will continue
to ―trickle in‖ after September 30.
750
80
20
(850)
(100)
(10)
(110)
d.
Structural overwithholding—
5 percent overwithholding on tax revenue from
withholding for the period January 1
through June 30, 19X4, subject to final settlement
on April 15, 19X5.
(70)
(70)
97
[Completely Superseded]
e.
Tax amnesty program—
The state instituted a special tax amnesty program
on April 1, 19X4, designed to collect unreported
past-due taxes.
As of June 30, 19X4, the program had produced
$80 in tax receipts.
Between July 1 and September 30, 19X4,
agreements were signed with taxpayers
to pay $60 in past-due taxes; of this amount,
$25 had been paid as of September 30, 19X4.
– With regard to the $25.
– With regard to the remaining $35.
Based on the favorable results, additional auditors
were added to the staff and the amnesty
date was extended by three months; it was estimated
that these actions would produce an additional $40.
(No accrual should be made because the taxes were
not actually assessed.)
80
25
35
–
140
f.
Other information—
Based on the strong economy during the period
January 1 through June 30, 19X4, state officials
concluded that the tax estimates filed for April 15
and June 15, 19X4 were understated and that
additional payments in future final settlements
are likely to be $100 higher than usual
to overcome the April 15 and June 15
understatements. (No accrual should be made
because GASB Statement 11 requires taxes
expected to be received through future final
settlement payments to be recognized in the
future period.)
–
–
Total revenue to be recognized before
opening balance reversals.
$3,465
98
[Completely Superseded]
Illustration 3A. Property Taxes
Assumptions
City A levies a property tax of $2 million in June 19X8 for the budgetary period
July 1, 19X8 through June 30, 19X9. The taxes are due to be paid on July 15, 19X8 and
January 15, 19X9. The city issues its annual financial report on September 30, 19X9, with
a cut-off date of August 31 for accrual information. The city has this information about
property taxes levied for the fiscal period ending June 30, 19X9. All amounts are in
thousands.
Cash receipts June 19X8
Cash receipts July–December 19X8
Cash receipts January–June 19X9
Cash receipts July–August 19X9
$
50
940
925
40
$1,955
Cash expected to be received September 19X9–December 19X9.
Tax abatements after appeals.
Expected receipts after foreclosure on $10 of delinquent taxes.
Interest accrued through June 30, 19X9 on delinquencies.
20
15
5
2
Solution
City A would recognize revenue for the period ended June 30, 19X9:
Levy for the budgetary period July 1, 19X8 through
June 30, 19X9 that is due during the same period.
Less:
Tax abatements after appeal.
Taxes not expected to be recovered through foreclosure.
Plus:
Interest accrued through June 30, 19X9 on delinquencies
99
$2,000
(15)
(5)
2
$1,982
[Completely Superseded]
Illustration 3B. Property Taxes
Assumptions
City B levies property taxes in June 19X8 for the budgetary period July 1, 19X8
through June 30, 19X9. One-half of the taxes is due to be paid July 15, 19X9 (interest
starts after that date) and the other half is due to be paid November 15, 19X9. The city
issues its annual financial report on September 30, 19X9, with a cut-off date of August 31
for accrual information. The city has this information about levies it made in June 19X7
and June 19X8. All amounts are in thousands.
Amount of levy
Cash received in June 19X8
Cash received in July 19X8
Cash received in November 19X8 and later
Cash received in June 19X9
Cash received in July 19X9
Cash expected to be received in November 19X9
and later
June 19X7
Levy
June 19X8
Levy
$1,500
40
700
760
$1,800
50
850
______
$1,500
900
$1,800
Solution
City B would recognize revenue for the period ended June 30, 19X9:
Based on June 19X7 levy for the budgetary period
July 1, 19X7 through June 30, 19X8 that
is due in the fiscal year ending
June 30, 19X9, regardless of when received.
100
$1,500
[Completely Superseded]
Illustration 3C. Property Taxes
Assumptions
School District C has a fiscal year that ends June 30. The district has this
information about its property tax revenue for the period July 1, 19X8 to June 30, 19X9.
All amounts are in thousands.
a.
b.
c.
Taxes are levied in January 1 each year for the calendar year; 50 percent of the levy is
due in May of that year and 50 percent is due in October. The amounts are budgeted
for the period in which they are due to be paid.
For the calendar year 19X8, the levy is $1,000. Of the $500 due in May, $475 is
received in May and $25 is received in July. Of the $500 due in October, $460 is
received in October and $40 is received in December.
For the calendar year 19X9, the levy is $1,200. Of the $600 due in May, $550 is
received in May, $30 is received in July, and $20 is unreceived but is expected to be
received in November.
Solution
School District C would recognize revenue for the period ended June 30, 19X9:
Payments due in October 19X8 against the
19X8 levy, that are expected to be received,
regardless of when received.
Payments due in May 19X9 against the 19X9
levy, that are expected to be received,
regardless of when received.
101
$ 500
600
$1,100